Do You Forgot To Calculate Time Value Of Money On InvestmentsWe all know the fact that a dollar received in the future has lesser value than a dollar received today. Conversely, a dollar received today is more valuable than a dollar received in the future because it can be invested to make more money.The value of the money you have now is not the same as it will be in the future and vice versa. So, it is important to know how to calculate the time value of money so that you can distinguish between the worth of investments that offer you returns at different times.
Suppose we invested 100 dollars for one year and earning are expected to remain 5 percent interest now the amount $105 which is the return after one year is the future value of your $100.In other words a dollar today is quite worthy then a dollar after 1 year. Now many times when we track the portfolio on the basis of our cost and the return, which we get we always forget to keep in mind the time factor.As money brings money we should not forget that every penny is important and your investment decisions should be better for more earnings.You can try different investment strategies and rate of returns and time period to check out as what will fulfill your investment needs.
This will help you a lot to identify whether you should opt in a investment or not. Specially if it is a fixed investment type it gives you better insight and decision making.
It provides answer to questions such as
- If $500 is deposited per month in a savings account and earns 4% interest (compounded monthly) for 1½ years, how much is it worth today?
- How much will a deposit of $500 per month in an account earning 4% interest (compounded every 4 weeks) be worth in 1½ years?
- Inflation rate
- NPV(Net present value)
- IRR (Internal Rate of return)