Time value of money
The time value of money is the idea that a rupee today is worth more than the same rupee later, because the rupee you have now has more years to grow. It is not that early money is special. It is that early money has more years for growth to build on growth.
The idea
A rupee invested today has more time ahead of it to earn on its earnings, so it can end up worth more than a larger rupee invested later. This is compounding at work: the growth your money earns starts earning its own growth, year after year.
Why waiting costs something
Waiting for a bigger amount before you start can cost you years, and those years are where compounding does its heaviest lifting. A smaller amount with a long runway can end up ahead of a larger amount with a short one.
Looking backwards: present value
The same idea works in reverse. A sum promised in the future is worth less today than its face amount, because you could have been earning on money you hold now. How much less depends on the rate you assume and the time to wait.
What it does not say
The idea does not promise any rate of growth. Real returns vary and can be negative. It also does not include inflation, which is a separate reason a rupee later buys less. Maetis does not give investment advice.
Today against later (hypothetical, at a steady 10 percent a year)
Suppose you put ₹10,000 away at 10 percent a year. After one year it is ₹11,000, a gain of ₹1,000. After 20 years it is about ₹67,275, because each year's 10 percent is worked out on a bigger pile.
Looking back the other way: about ₹62,092 today, growing at 10 percent a year, would reach ₹1,00,000 in 5 years. So at that assumed rate, ₹1,00,000 promised in 5 years is worth about ₹62,092 today.
Common questions
- What is the time value of money in simple words?
- A rupee today is worth more than the same rupee later, because today's rupee has more time to grow.
- Why does it matter for investing?
- Because starting earlier gives money more years to compound, which can matter more than the amount you start with.
- What is present value?
- What a future sum is worth today, at a rate you assume. A larger rate or a longer wait makes it worth less today.
- Is the time value of money the same as inflation?
- No. Inflation is rising prices, which makes a future rupee buy less. The time value of money is about the growth a rupee could earn if you hold it now.