Definition
Time Value of Money
The time value of money is the principle that a rupee today is worth more than a rupee in the future, because today's rupee can be invested to earn returns.
This single idea underpins all of finance: discounting future cash flows to a present value, compounding savings into a future value, valuing loans, and comparing investment options. It is why starting to invest early matters so much — money invested in your twenties has decades to compound, dwarfing larger sums invested later.
For everyday decisions, the time value of money explains why ₹1 lakh now beats ₹1 lakh in five years, why EMIs cost more than the sticker price, and why delaying saving is so expensive. Understanding it turns abstract patience into a concrete, quantifiable advantage.
Related terms
- Hyperbolic DiscountingHyperbolic discounting is our tendency to strongly prefer smaller rewards now over larger rewards later, valuing the present far more than the future.
- Present ValuePresent value is what a future sum of money is worth today, calculated by 'discounting' it at an appropriate rate to reflect the time value of money.
- Future ValueFuture value is what a sum of money invested today will grow to by a future date, given an assumed rate of return and compounding.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.