Monday, July 03, 2017

Time Value of Money

A key pillar in understanding Financial Mathematics is 'Time Value of Money'. It helps decision makers choose between very different courses of action. $1,000 today is worth more than $1,000 in one year's time, and much more than in 25 years' time. This is because of the opportunity cost of not having that money now. The money could be put to work, and the money the money makes could be reinvested. The difference between saving and investing, is whether the money is being stored or is working. The problem with only using this thinking is that the returns in the very distant future are worth very little now. This is where sustainability becomes essential. If we aren't good custodians, eventually the opportunities will run out, and the costs will catch up. The basic assumption of Time Value is that you can always come back to the things you neglect. Be careful what you assume. We don't own our opportunities, we look after them till it is our turn to pass them on.

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