Time Value of Money

Time value of money refers to the potential that money has to change in value over a period of time. The change in the value is due to the re-investment of returns over time. This ability of money to earn makes the money in hand today more valuable than the same amount of money received on a future date. Inflation has the opposite effect on the time value of money. Money left idle loses value over time. The purchasing power of a sum of money reduces over time because inflation makes goods and services more expensive.