What is the Time Value of Money?

The time value of money is the idea that ₹100 today is worth more than ₹100 received a year from now. Money you have today can be invested to earn a return, prices tend to rise over time, and the future is uncertain. So anyone who gives up the use of money, like a bank depositor or a lender, expects to be paid for waiting. That payment is interest or return.

Almost every financial decision uses this idea, from fixed deposits and loans to retirement planning and comparing two offers.

Why is money today worth more than money tomorrow?

Money today is worth more for four reasons:

1. It can earn a return. If you have the money now, you can put it in a deposit or investment. Receiving it later means losing what it could have earned in the meantime.
2. Prices rise. Because of inflation, the same amount buys less in future than it does today.
3. The future is uncertain. A promise to pay later carries a risk that the money may not arrive in full or on time.
4. Waiting has a cost. Saving means giving up something you could use now, so it is fair to expect compensation for that sacrifice.

A simple example: when a bank lends you ₹10,000 for six months, you repay ₹10,000 plus interest. When you place ₹10,000 in a six-month fixed deposit, the bank pays you ₹10,000 plus interest. In both cases the interest is the price of using money over time.

What are future value and present value?

Future value is what a sum of money today will grow to after earning a return for a number of years. Present value is the reverse: what a sum to be received in future is worth in today's money.

Term	Question it answers	Formula
Future value (FV)	What will this money grow to?	FV = PV × (1 + r)n
Present value (PV)	What is that future money worth today?	PV = FV ÷ (1 + r)n

r is the yearly rate as a decimal (10% = 0.10) and n is the number of years.

Finding a present value is also called discounting. It lets you compare money received at different times on the same footing. For example, if you are promised ₹5 lakh in ten years, discounting tells you what that promise is worth today.

Does it matter how often interest is paid?

Yes. The more often interest is added to your money, the more you earn, because each interest payment starts earning interest of its own.

Take ₹1,00,000 invested for one year at 8% a year:

• Interest added once a year: you receive ₹8,000, for a total of ₹1,08,000.
• Interest added every six months: after six months you earn 4%, or ₹4,000. For the next six months, 4% is earned on ₹1,04,000, which is ₹4,160. The total is ₹1,08,160.

Interest can be added at any interval: yearly, half-yearly, quarterly, monthly or even daily. The lesson on interest rates later in this module shows how to compare such offers.

Should you take ₹1 lakh now or ₹1.2 lakh in three years?

It depends on what you could earn on ₹1 lakh in the meantime. Discount the future amount at that rate and compare it with ₹1 lakh today.

If you can earn (hypothetical)	₹1.2 lakh in 3 years is worth today	Better choice
5% a year	₹1,20,000 ÷ (1.05)3 ≈ ₹1,03,661	Wait for ₹1.2 lakh
7% a year	₹1,20,000 ÷ (1.07)3 ≈ ₹97,956	Take ₹1 lakh now

The two options are equal at about 6.3% a year. Above that rate, money now wins; below it, waiting wins. This is the time value of money doing its everyday job: turning amounts at different dates into numbers you can compare.

What does spending ₹2,500 today really cost?

Spending money today costs more than its price tag, because you also give up what it could have grown into. Here is a worked example with hypothetical numbers.

Suppose you are 25 and have ₹2,500. You can spend it on something you want, or invest it until you retire at 60. Assume it earns a hypothetical 10% a year for those 35 years.

• FV = 2,500 × (1.10)³⁵
• (1.10)³⁵ ≈ 28.10
• FV ≈ 2,500 × 28.10 = ₹70,256

So the real cost of spending ₹2,500 today is about ₹70,000 of future money.

But ₹70,256 in 35 years will not buy what ₹70,256 buys today. To see its value in today's money, discount it by inflation. Assume a hypothetical 6% inflation a year, a little above the RBI's 4% target:

• PV = 70,256 ÷ (1.06)³⁵
• PV ≈ ₹9,141 in today's money

As of October 2026. The RBI's inflation target is 4%, set by the government for April 2026 to March 2031. Targets and actual inflation change over time, so check the latest on the RBI website.

Even after inflation, the ₹2,500 you invest today could be worth more than three and a half times as much in real terms. That is why small, unplanned expenses can cost you a lot of future wealth. It does not mean you should never spend. It means you should know the trade-off when you do.

Where is the time value of money used?

You use this idea, often without noticing, whenever money moves across time:

• Loans: the EMI you pay includes interest for the time you use the bank's money.
• Deposits: fixed deposits and savings accounts pay you for the time the bank uses your money.
• Retirement planning: working out how much you need in future, and what to save today to get there.
• Comparing offers: such as the ₹1 lakh now versus ₹1.2 lakh later example above.
• Valuing investments: later in this course, the valuation lessons use discounting to estimate what a share is worth.

Different people value time differently. Someone saving for a house next year needs certainty more than growth, while someone saving for retirement in 30 years can wait longer for higher returns. The time value of money gives both of them a common way to compare choices.

Quick quiz

3 quick questions on this lesson. Choose your answers, then press Check answers.

1. Why is ₹100 today worth more than ₹100 a year from now?

Choose all that apply.

Money today can be invested to earn a return Prices tend to rise, so money buys less later A future payment may not arrive in full or on time Notes printed this year are worth more than next year's

Show answer

Answer: Money today can be invested to earn a return; Prices tend to rise, so money buys less later; A future payment may not arrive in full or on time. Earning potential, inflation and uncertainty all make money today more valuable. Notes don't change value by the year they were printed.

2. ₹1,00,000 earns 8% a year, with interest added every six months. What do you have after one year?

Choose one answer.

₹1,08,000 ₹1,08,160 ₹1,16,000 ₹1,04,000

Show answer

Answer: ₹1,08,160. 4% for the first six months gives ₹1,04,000. The next 4% is earned on ₹1,04,000, adding ₹4,160, for ₹1,08,160.

3. Discounting converts an amount you will receive in future into its value today.

True or false?

True False

Show answer

Answer: True. Discounting is how you find present value, so amounts at different dates can be compared fairly.