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Our everyday life is characterized by spending, which in turn goes to damage our daily finances. However, it’s so unfortunate that many of us do not consider the Time Value of Money while dealing with money.
The time value of money (TVM) is the idea that the money you have today is worth more today than the same amount of money in the future.
The time value of money is significant and can help you in so many ways if you apply it correctly. Most importantly, TVM can help you determine how much money to spend now and how much money to save up if you have a specific goal in mind.
Well, that is just a perk of an ice berk when you talk about the Time Value of Money. That’s why today’s article will expose all you need to know about TVM and how you can apply it this new year.
Time Value of Money (TVM) is commonly known as the concept that money is worth more in the present than it would be in the future. Now that sounds a bit too weird, but here are a few reasons why:
For Example, if you’re given $1,000 today, and you buy a small piece of land or start up a lucrative business, you will end up getting back up to $2,000 in the next two to three years.
As you may already know, inflation has been in existence for a long time and may not leave anytime soon. That means a product you can buy with $500 may cost up to $600 in years, whereas you can afford to buy it now and wait.
As long as money is concerned, there must be uncertainties. No wonder when you promise a kid something, they would prefer you do it immediately.
Now that doesn’t just end with kids; you and I know that if we fail to fulfill our promise now, we may not be able to fulfill it again. That further makes TVM real since it is better to have it now than wait.
Well, it gets complicated when solving real-life problems; that’s why you need to learn and know the formula for calculating TVM, which is as follows:
PV = FV / (1+r)n
FV = PV x (1+r)n
PV = Present value of money
FV = Future value of money
r = interest rate
n = number of periods per year
Among all the terms that go along with spending, taking out an online payday loan (short term loan), earning, and others, the Time Value of Money is one of the most vital ones.
Apart from the fact that people who don’t understand the concept of TVM usually end up being bankrupt, there are uncountable reasons why you need to understand TVM and adequately apply it in your daily life.
If you understand TVM, you will be more conscious of spending your money and saving more than you used to do. You will also have a mindset geared towards productive investments, thus giving you a ticket to being a billionaire in the future.
Time value of money is what every investor applies to know when and how to invest since it can help them from making mistakes; so yea, you need it!
When it comes to everyday financial decision-making, the importance of the time value of money cannot be overemphasized. To prove this, below are some areas where TVM can help your daily life:
With the proper application of TVM, your loan experience would drastically improve. First, you can tell which loan to accept and when to do so, knowing fully well that the added interest, if invested, can yield something more meaningful.
Secondly, with proper calculation of TVM, you can know whether to pay off your loan now or wait till some other time. That sounds weird right, well, one thing you should consider is that you can invest that money now and get back more than double in the future, which would be more than enough to pay off your loan.
Investing to reach financial independence is the principal aim of the time value of money. If you adopt the principle of TVM in your daily life, you will build up a better financial quotient in the future. However, it involves strong determination and patience.
The TVM doesn’t directly affect your short-term loan, but it can be a factor in deciding between different loan options. With a proper calculation of TVM, you can know if paying off your loan and saving the interest for future investment would make sense. You can also know which payday loan option to take, knowing what interest rates are due.
It’s an unchangeable fact that you can never recover from each tick of the clock, so you need to maximize every time you have. The best way to do this is to delay gratification and invest now. By that, you need to limit the amount of money you spend on liabilities. So if you’re getting a loan from a lender, make sure it is for investment purposes.
As you earn, spend, and invest money, there’s a lot to keep in mind, and the time value of money should come first.
Over decades, proper knowledge of the time value of money has helped successful people become who they are, and if you want to be one, you seriously need it. However, it doesn’t stop there!
As you apply the TVM formulas in your daily life, you need to be determined and resilient since you will be striving against pleasures to get a better future. It would help if you could track your activities by writing down expenses/earnings to make them more manageable.