Time value of money.
In plain English
Time value of money (TVM) is the foundational idea in finance: a dollar today is worth more than the same dollar a year from now because the dollar today can earn a return in the interim. Two calculations sit underneath: future value (FV), which projects what today's dollars will be worth at a future date given an assumed return, and present value (PV), which discounts a future dollar back to today's terms. Every retirement projection, every bond price, every business valuation runs on these two calculations.
01Why it matters
TVM is the math behind almost every consequential financial question: 'how much do I need to save monthly to retire at X?,' 'is this $1,000-now-or-$1,200-in-five-years offer worth taking?,' 'what is this rental property actually worth?' The investor who internalizes TVM stops thinking in nominal dollars and starts thinking in today's-dollars-with-an-assumed-discount-rate.
02The math, step by step
Future value: $5,000 invested today at 7% compounded annually grows to $5,000 x (1.07)^30 = about $38,061 in 30 years. Present value: receiving $38,061 in 30 years is worth $5,000 today at the same 7% discount rate. The same equation, run in opposite directions.
03What this is NOT
TVM and inflation are related but not the same. TVM works whether or not inflation exists: even with zero inflation, money today can earn interest, so a future dollar is worth less than a present dollar. Inflation amplifies the gap; it does not create it.