Time value of money
Why $100 today isn't equal to $100 tomorrow. Compounding, discounting, and the three reasons money today is worth more.
Play with it
Time value of money. Grow money forward with compounding, then pull future cash back to today.
Prices rising each year, shrinking what money can buy.
Invested, in future dollars$432
Invested, in today's dollars$206
Kept as cash, in today's dollars$48
$100 today grows to $432 after 30 years at 5.0%. After 2.5% inflation that buys what $206 buys today, while the same money kept as cash shrinks to $48 of today's buying power.
Try this
- Set the return to 5% and the years to 1. Does $100 become $105, like in the episode?
- Double the years from 25 to 50. Does the final amount double, or do more than double?
- Set the return equal to inflation. What happens to the green line, and why?
The math
- future value
- money today (present value)
- annual return
- number of years
Quick check
Two questions to see if it clicked. Answers explain themselves.