Time Value of Money

The time value of money describes how the money available to you today is worth more than the same amount of money at a future date. This concept is useful when determining the value of a sum of money or asset over time.

Inflation’s Impact on the Real Value of Money

Inflation increases the prices of goods and services over time, effectively decreasing the amount of goods and services you can buy with a dollar in the future as opposed to a dollar today. If wages remain the same but inflation causes the prices of goods and services to increase over time, it will take a larger percentage of your income to purchase the same good or service in the future.

Inflation decreases the value of a dollar over time.

example- if a Chips costs $ 2 today, it’s possible that it could cost $3 for the same Chips one year from today.

Prices of product go up in inflation, so you can buy less with the money you have now. If you invest your money, bank or elsewhere, then you will have to compare how much your money is growing with how much the inflation rate is. If inflation is at 3%, and your money is growing at 5%, then you’re ahead. You can do more with you or money later in time than today. But if your money only grew at 2%, while inflation went up by 3%, you’re poorer when you cash in on your investment

Saving a sum of money now is simply the decision to have cash despite the risk of inflation. Low inflationary risk favors saving the money now while high inflationary risk favors spending it in now before the value of your money becomes eroded.