Time Value of Money

Which is worth more, a dollar today or a dollar tomorrow? Or, put another way, is it better to have a dollar today or a dollar tomorrow?

As consumers, we have a natural desire to have money right now. We have a disposition to value having money today over having money tomorrow. But there are actually other reasons why a dollar today is worth more than one tomorrow.

Having a dollar right now gives me options about what to do with that dollar. I can spend it, yes, but I can also invest it. If I invested it, that dollar would be worth more in the future, as my investment grows. So at a 5% interest rate, if I had $100 now, it would be the same as if I had $105 in a year. In that example, $100 now = $105 later.

Of course, interest rates aren't the only thing that affects the value of money. While interest is making your money grow, inflation is eating away at the true value of that money. This is why investing in low-paying investment won't really earn you anything in the long run. The purchasing power of your money will not grow.

Right now, bank CDs are paying very low interest rates. Well below the rate of inflation. Putting money into a CD will actually cause your purchasing power to decrease. So when considering investments, do not only look at the rate, but consider the future value of your money and how your decisions today affect your overall purchasing power.