Time Value of Money

CONNECTIONS DIAGRAM

Time value of money is an essential component of financial planning and connects to all
areas of financial planning. Time value of money calculations can assist clients in
meeting their financial goals such as in education planning or retirement and income
planning. Time value of money (TVM) refers to the notion that money received today is
not worth the same as an equal amount of money received at a future date. For example,
$100 received today is worth more than $100 that would be received 10 years from now,
as today’s amount can be saved or invested, earning interest, and could subsequently
compound in value. TVM calculations serve as tools for comparing prospective
investments and projects, making sound financial decisions, and properly planning for
clients’ objectives. Indeed, TVM calculations are essential in the world of financial
planning. TVM is the foundation for financial modeling, stock and bond pricing,
insurance, and pension fund valuation. Therefore, it is crucial that professionals in the
field of financial planning master these fundamental concepts and calculations.