November 11, 2025
1 mins read
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If you have ever said, “today, ₹1,000 seems to be way more useful than ₹1,000 a year from now,” you have grasped the time value of money (TVM); it's the basis of smart investing. It is that simple: money received today is more valuable than the same amount received in the future, which is simply an expectation of getting that amount. Money is an asset that can be invested and earn a return, compound, and grow over time.
If you received ₹1,000 today, you could deposit it in a fixed deposit account, invest it in a mutual fund, or even start a business. One year later, you don't just have ₹1,000; you have ₹1,000 plus returns on your investment, so time is valuable to you. Money that is held back, or delayed, always has an opportunity cost.
So why is this important to you? TVM is more than theory. It influences your investment selection, retirement planning, and even loan strategies and application for loans to contribute to your spending. Once you start thinking in terms of TVM, your money decisions will automatically become better.
At its core, TVM is about the trade-off between money now and money later. ₹10,000 in your account today can be put to work and grow, but the same ₹10,000 five years later has lost its edge because of inflation and lost opportunity.
For example, if you deposit ₹10,000 in a bank FD at 5% per year, it becomes ₹10,500 after a year. That extra ₹500 is the reward for having money today instead of waiting. Now imagine inflation is 6%—that same ₹10,000 buys fewer goods next year. Unless your money grows faster than inflation, you’re quietly losing value.
For you, TVM is like a personal compass. It helps you answer questions like: Should you take a lump sum today or staggered payouts later? Should you start investing now or wait? Every time you compare options, TVM is silently guiding you.
When you break TVM down, there are two main ways of looking at it. Both are super relevant for you as an investor.
Present value tells you how much a future sum of money is worth today when discounted at a certain rate. Let’s say you expect ₹1,000 one year from now, with a discount rate of 10%. The PV is ₹909. That’s the “real” value today of that ₹1,000 in the future.
Why does this matter to you? Because when you’re comparing investments or planning goals, PV lets you cut through the numbers and see what future money is actually worth right now.
Future value flips the idea. It tells you what today’s money will grow into if invested at a given rate. Suppose you invest ₹10,000 at 8% annually for five years. Your FV = ₹14,693. That’s the magic of compounding working for you.
So, whenever you wonder, “If I start today, how much will I end up with?” you’re really calculating future value. It’s one of the most motivating ways to get serious about investing.
Time value of money uses formulas that may look intimidating at first, but once you practice, they become second nature. Here’s a quick guide for you:
Parameter | Formula | Purpose |
Present Value (PV) | PV = FV ÷ (1 + r)^n | Tells you the worth today of future money |
Future Value (FV) | FV = PV × (1 + r)^n | Shows what today’s money will grow into |
Annuity Value | PV = PMT × [(1 - (1 + r)^-n) ÷ r] | Calculates the value of periodic payments |
Perpetuity Value | PV = PMT ÷ r | Gives the value of never-ending payments |
Think of these as tools in your personal financial toolkit. Once you learn them, you can calculate everything from loan repayments to retirement savings to SIP targets.
Let's observe TVM in practice. Let us say you want to find out the FV of a ₹5,000 investment made today for a period of 3 years at 10% annual interest.
The equation reads:
FV = PV x (1 + r)^n
So,
FV = 5,000 x (1 + 0.10)^3
= 5,000 x 1.331
= ₹6,655
In other words, your investment of ₹5,000 today will yield a total balance of ₹6,655 by the end of three years. This is basic math but has extremely powerful implications. It clearly illustrates the vastly superior advantage to starting the savings process sooner than later.
Now this is where it gets really interesting. The frequency of compounding affects the growth of your money. The formula is as follows:
FV = PV × (1 + r/n)^(n×t)
Where:
r is the annual interest rate
n is the number of compounding periods per year
t is time in years
Suppose you invest ₹10,000 at 8% for 3 years.
Compounded annually (n=1): FV = ₹12,597
Compounded quarterly (n=4): FV = ₹12,701
Compounded monthly (n=12): FV = ₹12,740
The more frequently the money is compounded, the more the invested money can grow. This is a valuable reminder for you overall—don't just look at the interest rate—see how often the money is compounded.
The beauty of TVM is that it directly influences how you will handle your money in your own life. Here's how TVM impacts you as an investor:
Encourages you to invest sooner: The sooner you invest, the more time your money has to compound. Even a small amount today compounds to a large number over time.
Protects you from inflation: Inflation erodes value, and TVM provides you with the understanding of thinking about instruments that outpace inflation so that your wealth does not shrink in real terms.
Compares investment options: Should you take the lump sum now or staggered payments a year later? TVM allows you to reference both clearly and supports a comparison of both strokes.
Encourages diversification: By taking time and return into consideration, you can balance both your short-term wants and long-term goals more efficiently.
Every time you make an investment decision or option, you have time. Once you start to think about a decision through the framework of time value of money, you will start to realize that you can be making better decisions and with conviction.
The time value of money is not just theory. It’s the way you should think about every rupee you handle. Whether you’re saving for retirement, planning your child’s education, or managing a loan, TVM is the invisible guide making sure your money works harder for you.
Start early. Understand the role of compounding. Keep inflation in mind. And above all, remember that the decisions you make today can save you years of stress later. If you embrace the time value of money, you’re not just investing—you’re building a future where your money is always one step ahead of time.
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The time value of money demonstrates how cash today is worth more than the same amount of cash in the future, since it is able to earn money in the future, and helps shape financial planning.
TVM helps evaluate various choices and invest accordingly. This way, it will optimally utilize the available resources for returns.
Main equations include Present Value (PV), Future Value (FV), and Annuity Value, which help take any important decision with a financial perspective.
Compounding makes more money because it takes every dollar earned and reinvests it, making investment much more rewarding in earlier years.
Present Value determines the value of today of future sums while future sum calculates future value of currently available sums.
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