Time Value of Money- PV & FV

Let's talk Time Value of Money (TVM).

What is it really?? what does it mean??

Everytime when you buy something or make some financial decisions, you should consider the time value of money.

TVM is based on the concept that a ringgit you own today is worth more than a ringgit that you will receive in the future.. Because the money you hold today, you can invest it and earn interest. After all, you should receive some compensation for foregoing spending.

For instance, you can invest your ringgit for one year at a 10% annual interest rate and accummulate RM1.10 at the end of the year. You can say that the future value of the ringgit is RM1.10 given a 10% interest rate and a one-year period. It follows that the present value of the RM1.10 you expect to receive in one year is only RM1.

I'm just going to show some examples on this concept of time value of money. Note the followings:
Principal - sum of money initially saved or invested;
Interest - monetary return from the investment.

Interest = Principal (P) x Rate of Interest (I) x Time or period (N)

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e.g 1: What is the future value after 5 years for a principal of RM10,000 at 6%interest compounded annually? PV= 10,000 ; i=0.06 ; n= 5

answer: FV= 10,000(1+.06) to the power of 5 =10,000 (1.3382255776 ) = 13,382.26

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Similarly, we can count backward to get the Present value (PV), if we are given the Future Value (FV), Interest (i) and Time (n).

e.g 2: You want to have total savings of RM20,000 in 20 years. Your annual interest rate is 6%, compounded yearly. How much principal must be invested now?

FV= 20,000 ; n=20 ; i = 6%

answer: PV = 6,236 (I just use my financial calculator, so no workings shown)

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These are just part of TVM computation, i.e. Single Sum models. Now we know that with every ringgit we spend now, there is a cost to it. You are losing out on the interest or return, should you not spend it, instead you saved it or invested it.

So folks, better spend wisely eh??