What is the value of money over time?

Money is worth more today than tomorrow. Simple. The time value of money suggests that a dollar in your hand now is worth more than that same dollar received in the future. Why? Because today you can invest it and make it grow.

The IRR is not an easy thing. It is calculated with complicated formulas, and inflation is always there, lurking, changing everything.

Introduction

Money means different things to each person. Some ignore it. Others live for it. Obsessed.

When measuring its value over time, we use certain indicators. Imagine you are offered a small raise now or a larger one at the end of the year. What would you do? Understanding the time value of money would give you the answer, although not always the most obvious one.

Basic Concepts of the Time Value of Money

Opportunity cost is key. Waiting for money means losing chances.

Think of it this way: your friend owes you $1000 and wants to pay it back before going on a year-long trip. He gives you two options: receive $1000 now or wait 12 months. Better now, right? You could put it to work in an account or invest it. Inflation would also eat away part of its value if you wait.

So, how much should you receive in 12 months for it to be worth the wait? At least enough to make up for what you could have earned. Seems fair.

What is the current and future value of money?

The current value is like a financial time machine. It tells you what a future money is worth today. In our example, it would be useful to know the real current value of those $1000 that you would receive in a year.

The future value is the opposite. It projects what today's money will be worth tomorrow. It includes interest and other mysterious things.

Calculate the future value of money

It's not that complicated. With our example and an interest rate of 2%, today's $1000 would be:

VF = $1000 * 1.02 = $1020

And in two years?

VF = $1000 * 1.02² = $1040.40

All thanks to compound interest. The general formula seems intimidating but it is not:

FV = I * (1 + r)^n

Where I is what you put in, r is the interest, and n is the time. Simple.

This calculation is vital for deciding between money now or later. Sometimes the answer is surprising.

Calculation of the present value of money

Here we go in reverse. If your friend promises $1030 in a year, is it worth it to you? With a 2% interest:

PV = $1030 / 1.02 = $1009.80

It seems so. You would earn an extra $9.80. The wait makes sense.

The formula is:

VP = VF / (1 + r)^n

The effect of capitalization and inflation

Compound effect

Compound interest is magical. It accumulates benefits on benefits. That changes everything in the long run.

If we capitalize more frequently, the result improves:

FV = PV * (1 + r/t)^(n*t)

With quarterly capitalization:

VF = $1000 * (1 + 0.02/4)^(1*4) = $1020.15

Just 15 cents difference. It doesn't seem like much. But with large amounts and enough time... wow.

Inflation effect

Inflation is the silent villain. A 2% interest with 3% inflation means losing money in real terms. Brutal.

Measuring inflation is complicated. Each index gives a different number. It's not like bank interest, clear and defined. Inflation is more... rebellious. Unpredictable in the long term. That complicates our calculations.

Application in cryptocurrencies

Cryptos also respond to these principles. Ethereum staking is a perfect example: should you use your ETH now or lock it for months for a reward? The TVM helps decide between different investments.

Something curious happens with Bitcoin. Although many see it as deflationary, technically it is now inflationary because its supply continues to increase. According to the TVM, it's better to buy today than tomorrow. But the price fluctuates so much... it complicates things.

In conclusion

The time value of money was probably already in your financial intuition. Interest, returns, and inflation are part of our daily economic life.

Formulas are especially important for serious companies and investors. For cryptocurrency enthusiasts, understanding this is fundamental. Not optional. Time and money always dance together. And those who understand the rhythm win.