The Time Value of Money
$1,000 today is more valuable than $1,000 in 10 years. Two reasons: inflation (purchasing power drops) and opportunity cost (invested now, it would grow).
What You’ll Learn
Why $1,000 today and $1,000 in 10 years aren’t the same — and how to use that to make decisions.
Content
$1,000 today is more valuable than $1,000 in 10 years. Two reasons: inflation (purchasing power drops) and opportunity cost (invested now, it would grow).
Think about the US in 2014: what would $100 buy? Gallon of milk, newspaper, transit, coffee. The same basket today: $135+. Same $100 bill, 26% purchasing power loss.
Formula: Future Value = Present Value × (1 + r)^n Invest $1,000 at 10% for 10 years: FV = 1,000 × (1.10)^10 = 1,000 × 2.594 = $2,594.
Inverse: Present Value = Future Value / (1 + r)^n $1,000 in 10 years, in today’s value: PV = 1,000 / (1.10)^10 = 1,000 / 2.594 = $386.
Practical decision example: “$5,000 car repair now or in 1 year?” Delaying and investing $5,000 at 5% HYSA yields $5,250. If delayed damage costs $8,000, early repair makes more sense. TVM shapes the choice.
Choosing a discount rate: Risk-free: HYSA APY (~4-5%). Stock expectation: 7-8% real. Investment decisions typically use 7-8% real (S&P long-term).
Other life decisions: Education (10-year future income vs today’s cost). Buy vs rent home (long-term calc). Retirement (true cost of starting late comes from TVM).
Practice quiz
Four practice questions for this page. The lesson in the app ends with one or two multiple-choice questions.
Question 1: $1,000 today, 10 years at 10% becomes:
- A) $1,200
- B) $2,000
- C) ~$2,594 (Correct)
- D) $10,000
Question 2: Two main reasons for time value of money?
- A) Inflation and opportunity cost (Correct)
- B) Tax and commission
- C) Population growth and technology
- D) Money supply and exchange rate
Question 3: Typical discount rate for investment decisions?
- A) 1-2%
- B) 7-8% real (Correct)
- C) 20-30% nominal
- D) 50%
Question 4: “Convert $1,000 in 1 year to today’s value” — which formula?
- A) FV × (1+r)^n
- B) FV / (1+r)^n (Correct)
- C) PV × n
- D) PV / n
Action
Pick a current money decision (phone upgrade, small investment, home repair). Run TVM math: now vs 1 year. Which makes more sense?
