Put yourself at ease by protecting those you love
08 June 2021
Taking steps towards financial wellness starts and ends with educating yourself. With just a quick Google search, anyone can learn everything there is to know about investing, blockchain, and other complex topics.
Learning about these subjects is a great idea, but you must never skip the fundamentals. Entering a venture without a firm grasp of basic financial concepts is no different from traveling without a map. To help you reach your goals with ease, here's a foundational concept in finance you should know about: the time value of money.
What is the Time Value of Money?
The time value of money (TVM) states that the savings you have now can increase in the future due to its potential earning capacity. Thanks to compounding interest, any amount of cash invested sooner has more value since it has a longer time horizon or the time one needs to wait before expecting their money back.
For example, let's say we have a deposit account with a 5% annual interest rate. If we deposit only P20,000 today and leave it for ten years, the account will have a higher value than if we made a larger deposit of P25,000 but only kept it for five years.
Economic factors and trends may also play a huge part in the returns you can get. Inflation may reduce the value of a currency, while high activity in the stock market may increase your assets' value. Keeping these points in mind, understanding TVM will benefit you greatly in your financial decisions.
Saving More through the Time Value of Money
To fully appreciate the time value of money, it's best to see this concept in action. Consider this simple case:
This should give you a better idea of how compounding interest can make your money work for you. While spending on your wants isn't necessarily a bad thing, you should always look at the bigger picture. If you're spending P100,000 yearly for temporary wants, imagine the number of savings opportunities you're missing out on.
Instead of draining your money aimlessly, look for stable investments and build a strong portfolio. Understanding your risk profile and how it lines up with your financial capabilities should help you identify which financial instruments are perfect for you.
3 Tips to Apply This Concept to Your Savings
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