Value of Money I Would Define the Essay

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Value of Money

I would define the time value of money as the value of what that money could be earning between the present day and the future time that one could have the same amount of money. In addition to the financial earnings, I would factor in opportunity costs to my calculation of the time value of money, because it is important to consider what opportunities, not simply earning opportunities but general opportunities, one would miss by not having that money available in the present time. In other words, the time value of money is what one will have to make in the future to replace the money that is missing now combined with the opportunities lost in the interim.

It is critical for financial managers to understand the concept of the time value of money, because it is the whole concept behind financial planning. Many people who seek out financial managers are high earners, but they are also high spenders. They want to be able to afford the trappings of an affluent lifestyle, and, because of their significant earning power, it can be very difficult for them to understand that the income stream is not going to be continuous throughout their lives.

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In fact, many of them may approach a financial manager with the knowledge that their income streams are likely to continue to increase for the foreseeable future, so that they are not prepared to save enough of their money to provide them with their desired lifestyles upon retirement. That is why a financial manager not only understanding the time-value of money, but also being able to explain it to a client can be critical.

The most critical thing that a financial manager can do is help a client understand the amount of money that he needs to retire, and then demonstrate how to build up that wealth prior to retirement age. By demonstrating the time value of money, the financial manager can demonstrate that there is a significant difference between $100 saved towards retirement today, in 10 years, in 20 years, or simply upon retirement. All three….....

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