Grade 7 Lesson 4: #Time #Value of #Money
Time value of money simply means that a #dollar or a #rupee (or any other currency) received today is worth more than a dollar or a rupee received at a later point in time (e.g., in one day, one month, or a year) because the money received today can start earning #interest immediately. Some of us may already know/understand this intuitively but very few of us truly understand its importance or how it can be applied.
Let us start trying to understand this with a simple example: suppose someone told you that you could have $100,000 today or $105,000 a year from now. Which would you prefer? Would you pick the $105,000 since it is more than the $100,000? This is where the concept of #timevalueofmoney comes in. We can't answer the question above unless we know one more thing – how much will I earn from investing the $100K for a year?
Now let's assume that you could get 10% per year if you were to invest the money.
Let's evaluate the options again: receive $100,000 today or receive $105,000 one year from now. For those of you who would rather have the $105,000 one year from now, you would have cheated yourself out of $5,000. If you collect $100,000 today, you can invest the money and earn 10% interest for the year, or $10,000, on that money. In one year, you would have a #principal and interest total of $110,000. This is $5,000 more than you would get if you opted to receive $105,000 one year in the future.
This time value of money idea means that if you have a choice of receiving money today or a year from now, the money you expect a year from now should be higher than the money you are offered today, plus any returns you can make from it over the 1 year. If the amounts are going to be the same, or the amount you receive a year from now is lesser than the #returns you can make by investing the money for a year, you should get the lower amount of money today and invest it.
In the next lesson, we will understand how to calculate/estimate the time value of money and the concepts of #presentvalue and #future value
ayu ecosystem #kids #education #financialliteracy #finance