The time value of money (TVM) is simple and profound: a naira today is worth more than a naira tomorrow, because today's money can earn interest. TVM is the foundation of all finance. Here is how it works.
The Core Idea
Money has a time dimension — receive it earlier, invest it, and it grows. This is why lenders charge interest and why future cash flows must be discounted to 'present value'.
Compounding (Future Value)
FV = PV × (1 + r)^n. Example: ₦100,000 at 10% for 5 years grows to about ₦161,000 — thanks to compounding.
Discounting (Present Value)
PV = FV ÷ (1 + r)^n. The reverse — valuing a future amount today. This drives bond and stock valuation.
Why It Matters
Every loan, savings plan and valuation uses TVM. Starting to save earlier multiplies the effect of the same monthly amount.
FAQ
What is the most important TVM idea?
Compounding — small early contributions grow dramatically over decades.
How do I use TVM practically?
Use calculators for loans/savings, and understand that 'future value' ignores inflation unless r is real.
Related: Bond and Stock Valuation and Invest Like the Rich.