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The Time-Value of Money in Real Estate: Understanding a Core Finance Principle
The time value of money (TVM) is an important concept in finance that helps investors maximize their earnings. The concept is relatively simple:
Money now is worth more than money in the future.
Why?
Because money now has earning potential. That is, your money can make more money if you have it right now.
The Time-Value of Money in Action
Imagine someone offers you the choice between $1,000 today or $1,000 in one year. You’d much rather have that money right now so that you can put it to work rather than getting that money in the future.
For example, imagine you place that $1,000 in an index fund that earns 5% over the course of the year. At the end of 12 months, you would have $1,050, which is better than getting $1,000 at the end of the year.