Have you heard of the time value of money concept? Do you know how the time value of money is affecting all of us?
Can you make use of the time value of money concept in investment?
Most people recognize the negative aspect of the time value of money. They know that the value of a dollar 30 years ago is more than the value of a dollar now.
They do not know the real reason for it. The reason is the time value of money.
What is the time value of money?
There is only one principle behind the time value of money. The principle is: A dollar today is worth more than a dollar tomorrow.
If you cannot remember all the concepts in finance and economics course, you must always remember that a dollar today is worth more than a dollar tomorrow.
Once you grasp this concept of the time value of money, you will change your outlook towards money. You will never spend money the way you used to.
Why is a dollar worth more than a dollar tomorrow?
The answer is the inflation rate. If the inflation rate is high, you will see the value of a dollar shrinks.
The rate is that everything is getting more expensive. The reason is that the oil price is heading north, and will not reverse the trend.
If the oil price increases by 10% in a year, that means your dollar shrinks by 10% in the purchasing power. You can buy less things with a dollar in the future.
How can you apply the time value of money?
The time value of money is working against all of us since the inflation rate is higher than the saving rates in the bank.
If we put our money in the bank, we are never going to enjoy the same buying power.
That is why we must find investment opportunities that allow us to maintain or increase the value of money.
If the inflation rate is 5%, and you can invest your money to get a 20% return, you are getting rich. You do not have to worry about the inflation rate.
That is why investing is so important. It is the only way to use the concept of the time value of money in a positive way.
The time value of money concept helps many people get rich. Some of them use their money to buy properties.
If they sell the properties many years later, they will see the high rate of returns from real estate investment. Many people manage to buy a house in a recession for $100000 and sell in market boom for $350000.
If you want to get rich, you must have a basic understanding of Economics. The time value of money is one of the fundamental concepts in Economics.
Scheng1 is a passionate blogger from Singapore. Rich in every sense reveals my deep desire in enjoying life, and be rich in every possible ways.