Time value of money explained

Time value of money explained clearly and quickly. After all, time is money, right? What’s important about money, in the context of spending money, saving money, or investing money? First of all, how much are we talking about? Second, money when? We need to know both the amount as well as the timing of the money.

⏱️TIMESTAMPS⏱️
0:00 Introduction to time value of money
0:24 Money now or money later
1:27 Time value of money: equivalent amounts in time
2:08 Future value formula
2:37 Future value example
3:29 Present value formula
4:16 Time value of money summary

How about a choice of $100 today or $105 one year from now? Maybe you will say: I am fine either way. If that’s the case, then we have just found the equivalent amounts in time, and identified the time value of money for you!

The time value that we found for you in this example is that $100 today equals $105 in one year. $100 is the present value of $105 one year from now. $105 is the future value (one year from now) of $100 today. Now I am going mathematical on you. $105 equals $100 times 1 plus 5% to the power 1. The future value equals the present value times 1 plus the rate of return, to the power of the number of years. The present value equals the future value divided by 1 plus the rate of return, to the power of the number of years. That might be a big abstract mathematical leap, let’s review it with an example.

The future value equals the present value times 1 plus the rate of return, to the power of the number of years. Let’s expand our example to two years. $100 today, multiplied by 1.05, is $105 one year from now. That same $105 one year from now, multiplied once more by 1.05, is $110.25 in two years. Or if you want to go straight from today to the future value two years from now, $100 today times 1.05 times 1.05 equals $110.25 two years from now. 1.05 times 1.05 is the same as 1.05 squared, which is the same as 1.1025.

We can also work in the opposite direction. The present value equals the future value divided by 1 plus the rate of return, to the power of the number of years. $110.25 two years from now, divided by 1.05, is $105 one year from now. That same $105 one year from now, divided once again by 1.05, equates to $100 present value today. Or if you want to go straight from two years from now to today, $110.25 divided by 1.05 times 1.05 equals $100 today. 1.05 times 1.05 is the same as 1.05 squared, which is the same as 1.1025.

Philip de Vroe (The Finance Storyteller) aims to make strategy, #finance and leadership enjoyable and easier to understand. Learn the business and accounting vocabulary to join the conversation with your CEO at your company. Understand how financial statements work in order to make better stock market #investing decisions. Philip delivers #financetraining in various formats: YouTube videos, classroom sessions, webinars, and business simulations. Connect with me through Linked In!

[RafaelSilva-skjd]

Watched this at 2x speed. Now I’m twice as rich

[JogNearNinjas]

Excellent explanation. I’m a semester away from an MBA and this beats all the textbook explanations I’ve read. Quick question. All the FV/PV examples rely on some sort of guaranteed or safe interest rate. How do our current extremely low guaranteed interest rates affect calculations like this? Given a 1% safe rate if you’re lucky, almost any project looks like a better investment.

[abeeralharbi]

you explained it better than my professor, thanks!!

[joshuabrown]

Great video, in the future you could consider showing us old folks how to input this into a calculator. It's been a long time since I've had to do this type of work.

[deionoliver]

Thank you very much for making this video it was extremely helpful and made the concept easy to understand! Just subscribed!

[jialincai]

Thank you. Im omw to IBD interview as a non-finance major. Your videos help alot.

[moneyfool]

Hi Finance storyteller, this is not related to the title here, but i'v been your subscriber and using your videos to learn about Finance. So grateful i'v found you. What book will u recommend for a newbie in finance to practise the maths with cases and examples in it?

[timothymtroy]

Would you be so kind to share the powerpoint that you used in this lesson? I found it extremely helpful.

[georgebrooking]

got damn that was incredibly clear and precise. what talent. thank you

[funkadog]

Great video, But I can't be the only one who'd still take the hundred today.

[hazelmonterde]

How can you describe the time value of money before 50yrs and 50yrs after from today?

[kikhwan]

But the issue is there is no inflation rate included. Supposed it is an investment (there is no other way we can get free money), we get the AMOUNT of it but what is the value?

How we want to make sure the amount we get represents the value we have now when the interest rate (what we get) can differ depending on banks or the type of investment?

[kmegres]

hi i dont understand where does 0.05 came from? how to know what is the value of the rate of return?

[pratikraj]

What if it was number of months instead of year?

[jeffwilken]

So is this how interest rates are determined? Supply and demand for money given now versus money given after a delay? If we all agree to postpone our consumption of $100 until one year from now, for a “price” of $5, is that tantamount to saying that our debtors will need to offer us 5%/year for the use of our money?

[Moccalocca]

There are people above us who decides what we can buy with 8 hours a day of our life...

[mohdaidilazhar]

I want to ask, if someone keep their millions of money at their home, is it affecting the financial status of most of citizen?

[aeasee]

just a quick question, how come you need to add 1 in (1+5%)? what does 1 represent?

[gfk]

And how to determine the ratio " r "

[kngfelixx]

You can apply this for a business?

I own a company and charge $35 a month for customers to come and play video games at my suite but am thinking of offering a discount to customers if pay a 6 month subscription. If they pay $150 for a subscription, that's about a $10 discount each month ($60 total). Would it be wise of me in doing this? I currently have about 150 people signed up for my subscription service paying $35 a month. I am trying to understand if this is in the best interest to offer something like this...