Time Value Of Money

If you have a choice of receiving a lump sum of money today or a periodic payment of the same amount over time which will you choose? You might think the latter would help you control your spending, but think again.

In inflationary terms, a dollar you receive today will always be worth more than a dollar you receive in the future. Time value of money(TVM in short) also tells us that any amount of money is worth more now than latter due to its potential interest earning prowess(If you invest it immediately). This applies to pension schemes, lottery winners or any scenario where you are given this choice. Always choose the lump sum payment.

The same concept can be used on day to day savings too. Buying in bulk is better than buying as and when necessary. Firstly, you will receive the bulk discount and secondly, you are saving money by not paying more at a latter time due to inflation. Which indirectly means, if inflation is 5% per year, you will save 5% from not buying the future goods if you have bought them in bulk at the present time.

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