Glossary

The time value of money (TVM) is a financial concept that explains how the value of money changes over time. 💸

It is based on the principle that a certain amount of money today is worth more than the same amount in the future, due to its potential earning capacity. This core principle of finance acknowledges that money can be invested to earn interest or returns, which means that money available now is worth more than the same amount later.

Example: If you have £1,000 today and can invest it at a 5% annual interest rate, in one year, you'll have £1,050. Therefore, £1,000 today is worth more than £1,000 in one year because of its potential to grow in value.

Fun fact: The concept of the time value of money dates back to ancient times. ⌛ The Babylonians and Greeks were among the first civilisations to acknowledge the earning potential of money and the importance of considering the time value of money in financial transactions.