Understanding the Value of Money

If you want to get personal finance right, one of the best foundations you need to zero in first is to understand the value of money.

We live in a world where money is a necessity. It’s the currency of the world and either you’re good at handling yours or not. It’s either you’re letting money control you or you controlling money.

In any case, there’s no question to the fact that money is valuable yesterday, today and tomorrow. Other than letting you buy what you need and want, the weight of money’s importance in personal finance is in relation to time.

If you ask financial experts, they’d tell you that one of the most fundamental money principal is its time value. Put simply, the money you have today is worth more in the future when used wisely. In other words, if you invest your money today in a way that money starts working for you over time, a dollar today will be worth more in the future.

But before you do go ahead and invest your money, let’s first further illustrate what time value is. Let’s say for example that you are offered £10,000 now or £10,000 five years later. If you were like most people, you’d opt for the former option. After all, money today is always more enticing than waiting five years down the road.

For most people, receiving the £10,000 today is all about instant gratification. It’s free money they can use to shop or buy whatever they want. If you’re someone, however, who understands the time value of money, you’ll see that the same choice is correct simply because receiving the money gives you the advantage of time.

Disregarding inflation and other factors, now is better than later because you get the chance to let time work for you. You can invest the money so it earns interest over the course of five years thereby increasing the future value of your £10,000.

The trick, as you can see, is to invest the money. This is the one of the best and trusted ways to take advantage of the concept of time value for money. Based on the illustration above, money at its simplest is equal to time. It’s all a matter of making it all work for you. Calculate the time value of money and choose the right investments to make money work for you like a charm over time.