Time Value Of Money

The time value of money is a concept that states a dollar today is always worth more than a dollar tomorrow. Suppose Steve wins a $1 million in the lottery today. Before accepting his prize, Steve has to make a decision. He can receive the prize money now or if he wants, he can collect the money in one year. Steve considers his options. If the money is taken today, he can deposit it in an interest bearing savings account at the local bank that offers 5% interest per year. If he decides not to take the money today, he has to wait a full year with no money and no interest. Steve's not crazy. So he decides to take the 1 million sooner rather than later. When the money is withdrawn after a year, it has grown to $1 million 50,000. By taking the money early, Steve earned an extra $50,000. This is the time value of money as it applies to interest. $1 million is worth more today because of the possible interest that it earns over the one year's time.