Time value of money (TVM)
The principle that a dollar today is worth more than a dollar in the future, because money available now can earn a return.
What it means
The time value of money says that timing matters. Money you have today can be saved or invested to grow, while money promised later carries the risk it may not arrive and loses buying power to inflation. So a dollar now is worth more than a dollar later.
TVM underpins most financial math: present value, future value, loan payments, annuity calculations and comparing lump sums with payment streams. The link between today and tomorrow is an interest or discount rate, and the further apart the dates, the bigger the gap in value.
Formula
FV = PV × (1 + r)^n
- FV = future value
- PV = present value
- r = rate of return per period
- n = number of periods
Example
Suppose you can earn 5% a year. $1,000 today would grow to $1,050 in one year, so receiving $1,000 next year is worth less than $1,000 now; at 5% it is worth about $952 today.
How it’s used
- Choosing between a lump sum and payments, such as a pension or settlement
- Calculating loan payments and mortgage costs
- Planning how much to save for future goals
Related terms
Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.