Why isn’t the time value of money applied to currency in terms of purchasing power? Let’s say I have a dollar from 1930. I should be able to exchange that dollar today anywhere based on its present value, right? Doesn’t make any sense to me but I’m slow
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Two reasons –
One is economic theory that it’s good that money reduces in value over time as it encourages people to put money into active investments (rather than hoarding), encourages spending (again rather than hoarding), and transfers wealth to workers as the value of savings goes down while wages are *supposed* to go up with inflation (problems occur when this doesn’t happen, like right now!).
The other is practical – how would your bank account work? Would every single dollar you put into your account need to be dated so it’s value is known? Is the value calculated when you pay in? What happens when you take money out, the amount is calculated based on how old the bills you receive are?
“Time value” of money referrs to how much money your time is worth, not how much time has passed since your coins were minted.
For example, some people say it’s better to change the oil on your car yourself because it costs less money. It’s true that it costs less money to change your own oil, but that’s where the “time value of money” comes to play. With the time I would have spent trying to save maybe $40, I could have instead used the time to make $400 doing something else. That’s why saving money in this situation is not worth it, because it costs time, which in turn has an opportunity cost which was worth 10x money than I saved.
“Time value” of money referrs to how much money your time is worth, not how much time has passed since your coins were minted.
For example, some people say it’s better to change the oil on your car yourself because it costs less money. It’s true that it costs less money to change your own oil, but that’s where the “time value of money” comes to play. With the time I would have spent trying to save maybe $40, I could have instead used the time to make $400 doing something else. That’s why saving money in this situation is not worth it, because it costs time, which in turn has an opportunity cost which was worth 10x money than I saved.
Two reasons –
One is economic theory that it’s good that money reduces in value over time as it encourages people to put money into active investments (rather than hoarding), encourages spending (again rather than hoarding), and transfers wealth to workers as the value of savings goes down while wages are *supposed* to go up with inflation (problems occur when this doesn’t happen, like right now!).
The other is practical – how would your bank account work? Would every single dollar you put into your account need to be dated so it’s value is known? Is the value calculated when you pay in? What happens when you take money out, the amount is calculated based on how old the bills you receive are?
A finance professor asked us what we thought affected the time value of money. Of course, people said things like inflation or the opportunity to invest. He said those are all secondary to the time value of money. Then he said, “If I tell you I will give you $10,000, but you have to choose if you want it now or the same amount three days from now, would you choose to take it now or three days from now?”
Of course the answer is to take it now every time. Sure, maybe you want to invest or hedge yourself from inflation and that’s why you want it now. Or maybe you want to just spend it on something you’re eager to buy. Or maybe you just don’t want to take the risk of something happening to the money-giver in the next three days that would prevent you from collecting.
Money is always more valuable right now. It is more valuable now than it was in the past, because you cannot spend in the past. A single sum is more valuable now than it will be in the future because time is a real resource that is consumed as you exist, and we sense an inherent value associated with it. Instruments like loans and bonds are built to pay interest or a greater sum later in an effort to justify the time lost along the way.
Your dollar from 1930 is not a savings bond that is built to account for the time value of money. It is not a share of stock in a company that has grown in value over time. It is a static unit of monetary measurement that is always worth one dollar right now.
A finance professor asked us what we thought affected the time value of money. Of course, people said things like inflation or the opportunity to invest. He said those are all secondary to the time value of money. Then he said, “If I tell you I will give you $10,000, but you have to choose if you want it now or the same amount three days from now, would you choose to take it now or three days from now?”
Of course the answer is to take it now every time. Sure, maybe you want to invest or hedge yourself from inflation and that’s why you want it now. Or maybe you want to just spend it on something you’re eager to buy. Or maybe you just don’t want to take the risk of something happening to the money-giver in the next three days that would prevent you from collecting.
Money is always more valuable right now. It is more valuable now than it was in the past, because you cannot spend in the past. A single sum is more valuable now than it will be in the future because time is a real resource that is consumed as you exist, and we sense an inherent value associated with it. Instruments like loans and bonds are built to pay interest or a greater sum later in an effort to justify the time lost along the way.
Your dollar from 1930 is not a savings bond that is built to account for the time value of money. It is not a share of stock in a company that has grown in value over time. It is a static unit of monetary measurement that is always worth one dollar right now.
A finance professor asked us what we thought affected the time value of money. Of course, people said things like inflation or the opportunity to invest. He said those are all secondary to the time value of money. Then he said, “If I tell you I will give you $10,000, but you have to choose if you want it now or the same amount three days from now, would you choose to take it now or three days from now?”
Of course the answer is to take it now every time. Sure, maybe you want to invest or hedge yourself from inflation and that’s why you want it now. Or maybe you want to just spend it on something you’re eager to buy. Or maybe you just don’t want to take the risk of something happening to the money-giver in the next three days that would prevent you from collecting.
Money is always more valuable right now. It is more valuable now than it was in the past, because you cannot spend in the past. A single sum is more valuable now than it will be in the future because time is a real resource that is consumed as you exist, and we sense an inherent value associated with it. Instruments like loans and bonds are built to pay interest or a greater sum later in an effort to justify the time lost along the way.
Your dollar from 1930 is not a savings bond that is built to account for the time value of money. It is not a share of stock in a company that has grown in value over time. It is a static unit of monetary measurement that is always worth one dollar right now.
The face value of the money is the face value.
You can sell old coins for more if someone agrees to pay it, but the actual value is written on the currency
The face value of the money is the face value.
You can sell old coins for more if someone agrees to pay it, but the actual value is written on the currency
The face value of the money is the face value.
You can sell old coins for more if someone agrees to pay it, but the actual value is written on the currency
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