What is the 'Time Value of Money  TVM'
The time value of money (TVM) is the idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity. This core principle of finance holds that, provided money can earn interest, any amount of money is worth more the sooner it is received. TVM is also referred to as present discounted value.
BREAKING DOWN 'Time Value of Money  TVM'
Money deposited in a savings account earns a certain interest rate. Rational investors prefer to receive money today rather than the same amount of money in the future because of money's potential to grow in value over a given period of time. Money earning an interest rate is said to be compounding in value.Basic Time Value of Money Formula and Example
Depending on the exact situation in question, the TVM formula may change slightly. For example, in the case of annuity or perpetuity payments, the generalized formula has additional or less factors. But in general, the most fundamental TVM formula takes into account the following variables:
FV = Future value of money
PV = Present value of money
i = interest rate
n = number of compounding periods per year
t = number of years
Based on these variables, the formula for TVM is:
FV = PV x (1 + (i / n)) ^ (n x t)
For example, assume a sum of $10,000 is invested for one year at 10% interest. The future value of that money is:
FV = $10,000 x (1 + (10% / 1) ^ (1 x 1) = $11,000
The formula can also be rearranged to find the value of the future sum in present day dollars. For example, the value of $5,000 one year from today, compounded at 7% interest, is:
PV = $5,000 / (1 + (7% / 1) ^ (1 x 1) = $4,673
Effect of Compounding Periods on Future Value
The number of compounding periods can have a drastic effect on the TVM calculations. Taking the $10,000 example above, if the number of compounding periods is increased to quarterly, monthly or daily, the ending future value calculations are:
Quarterly Compounding: FV = $10,000 x (1 + (10% / 4) ^ (4 x 1) = $11,038
Monthly Compounding: FV = $10,000 x (1 + (10% / 12) ^ (12 x 1) = $11,047
Daily Compounding: FV = $10,000 x (1 + (10% / 365) ^ (365 x 1) = $11,052
This shows TVM depends not only on interest rate and time horizon, but how many times the compounding calculations are computed each year.

Compounding
The ability of an asset to generate earnings, which are then ... 
Continuous Compounding
The process of earning interest on top of interest. The interest ... 
Compound Interest
Compound Interest is interest calculated on the initial principal ... 
Discrete Compounding
Discrete compounding refers to the method by which interest is ... 
Effective Annual Interest Rate
Effective Annual Interest Rate is an investment's annual rate ... 
Periodic Interest Rate
The interest rate charged on a loan or realized on an investment ...

Investing
Calculating Future Value
Future value is the value of an asset or cash at a specified date in the future that is equivalent in value to a specified sum today. 
Managing Wealth
Dissecting the Simple Interest Formula
Simple interest ignores the effect of compounding: it's only calculated on the principal amount. This makes it easier to calculate than compound interest. 
Investing
Understanding the Power of Compound Interest
Understanding compound interest is important for both investing and borrowing money. 
Investing
The Effective Annual Interest Rate
The effective annual interest rate is a way of restating the annual interest rate so that it takes into account the effects of compounding. 
Investing
Understanding the Time Value of Money
Find out why time really is money by learning to calculate present and future value. 
Investing
Overcoming Compounding's Dark Side
Understanding how money is made and lost over time can help you improve your returns. 
Investing
4 Ways Simple Interest Is Used In Real Life
Simple interest works in your favor when you're a borrower, but against you when you're an investor. 
Retirement
Are You On Track To Hit Your Desired Net Worth By Retirement?
Here are some calculations to determine if your net worth is what it should be at your age. 
Investing
Investing $100 a Month in Stocks for 20 Years
Learn how a monthly investment of just $100 can help build a future nest egg using properly diversified stocks or stock mutual funds.

Why does time value of money (TVM) assume that a dollar today is worth more than ...
Learn about time value of money, or TVM, and how a present value calculator is used to determine the value of money received ... Read Answer >> 
Why is the time value of money (TVM) an important concept to investors?
Understand why the time value of money is an important concept for investors. Learn when present value and future value calculations ... Read Answer >> 
What formula can I use to calculate interest on interest?
Find out more about compounding interest, what it measures and how to calculate the amount of compound interest accrued using ... Read Answer >> 
How to calculate compound loan interest in Excel?
Find out about compound interest and how to use the compounding interest formula in Microsoft Excel to calculate the compound ... Read Answer >> 
How do I use the rule of 72 to calculate continuous compounding?
Find out why the rule of 72 does not accurately reflect the growth caused by continuous compounding, and which number can ... Read Answer >>