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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“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.
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Because the idea itself doesn’t make sense?
The idea of the time value of “money” is simply a recognition of the value of OTHER stuff relative to time. Money here is just the measuring stick.
The idea is used a lot in terms of valuing alternative uses of resources. The idea being using a resource today has to return more than the initial resource itself for that use to be justified. That additional return is discounted by TIME. “Money” in this sense, is a proxy for “resource”.
Because the idea itself doesn’t make sense?
The idea of the time value of “money” is simply a recognition of the value of OTHER stuff relative to time. Money here is just the measuring stick.
The idea is used a lot in terms of valuing alternative uses of resources. The idea being using a resource today has to return more than the initial resource itself for that use to be justified. That additional return is discounted by TIME. “Money” in this sense, is a proxy for “resource”.
Because the idea itself doesn’t make sense?
The idea of the time value of “money” is simply a recognition of the value of OTHER stuff relative to time. Money here is just the measuring stick.
The idea is used a lot in terms of valuing alternative uses of resources. The idea being using a resource today has to return more than the initial resource itself for that use to be justified. That additional return is discounted by TIME. “Money” in this sense, is a proxy for “resource”.
Because the time value of money is very specifically not *directly* about money. It’s about what you could do *with* that money.
It’s all about the potential earning you could make if you put that money to good use. Both from “basic” stuff like stocks and bonds that have an interest rate but even from the idea that you could invest that into a business. $10,000 today that lets you buy a second widget maker for your factory is worth more than $10,000 a couple years from now
If you didn’t put that money to use then you lost out on that value. Money itself is worthless until it’s been used to do something, that is specifically what time value of money is about.
Also if older currency itself just…got more valuable over time:
a) that makes the economy *way* more complicated than it needs to be. Can you imagine going to the store and trying to buy something and they need to check the date on every single bill you give the cashier? Even if you use debit or credit the transaction is made way more complicated for no reason.
b) it means people horde money and you get deflation. That would have a huge negative impact on economic growth because people would refuse to buy anything because they would rather save.
Because the time value of money is very specifically not *directly* about money. It’s about what you could do *with* that money.
It’s all about the potential earning you could make if you put that money to good use. Both from “basic” stuff like stocks and bonds that have an interest rate but even from the idea that you could invest that into a business. $10,000 today that lets you buy a second widget maker for your factory is worth more than $10,000 a couple years from now
If you didn’t put that money to use then you lost out on that value. Money itself is worthless until it’s been used to do something, that is specifically what time value of money is about.
Also if older currency itself just…got more valuable over time:
a) that makes the economy *way* more complicated than it needs to be. Can you imagine going to the store and trying to buy something and they need to check the date on every single bill you give the cashier? Even if you use debit or credit the transaction is made way more complicated for no reason.
b) it means people horde money and you get deflation. That would have a huge negative impact on economic growth because people would refuse to buy anything because they would rather save.
Because the time value of money is very specifically not *directly* about money. It’s about what you could do *with* that money.
It’s all about the potential earning you could make if you put that money to good use. Both from “basic” stuff like stocks and bonds that have an interest rate but even from the idea that you could invest that into a business. $10,000 today that lets you buy a second widget maker for your factory is worth more than $10,000 a couple years from now
If you didn’t put that money to use then you lost out on that value. Money itself is worthless until it’s been used to do something, that is specifically what time value of money is about.
Also if older currency itself just…got more valuable over time:
a) that makes the economy *way* more complicated than it needs to be. Can you imagine going to the store and trying to buy something and they need to check the date on every single bill you give the cashier? Even if you use debit or credit the transaction is made way more complicated for no reason.
b) it means people horde money and you get deflation. That would have a huge negative impact on economic growth because people would refuse to buy anything because they would rather save.
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