Skip to main content Skip to main content
Not investment advice. Educational reading. See Disclaimer.
L.8 · BEGINNER · 2 MIN

Time Value of Money: Why a Dollar Today Beats a Dollar Later

A dollar today is worth more than a dollar next year. This is the economic foundation beneath every price in financial markets.

Quiz · 5 questions ↓

The present-value formula that discounts future money

Present Value = Future Value / (1 + r)^n

Three reasons future money is worth less than money now

Three reasons a dollar today beats a dollar tomorrow: (1) you can invest it now and earn a return, (2) inflation erodes purchasing power, (3) there is always risk you never receive the future payment.

Discounting a future payment back to today's value

At an 8% discount rate, how much is $1,000 received in 10 years worth today?

Why time value of money underpins every valuation

Time value of money is why DCF valuation works. Every future cash flow must be discounted to today's dollars. The further out the cash flow, the less it is worth now.

Check your understanding

Sit with the ideas.

Inflation runs at 6% for a year while your savings account pays 2%. What happened to your purchasing power?

Why:
Continue this lesson in the appAdaptive practice · saves your progress · remediation when you miss

Other lessons in this course.

  1. 01Supply, Demand & Market Prices
  2. 02Elasticity: Why Some Companies Have Pricing Power
  3. 03Opportunity Cost: The Hidden Price of Every Investment
  4. 04Costs of Production: Reading a Company's Margin Structure
  5. 05Perfect Competition: Why Commodity Businesses Struggle
  6. 06Monopoly Power: The Economics Behind Competitive Moats
  7. 07Monopolistic Competition: Brand Value and Differentiation
  8. 08Time Value of Money: Why a Dollar Today Beats a Dollar Later— reading now
  9. 09Externalities: ESG Risks and Regulatory Costs
  10. 10From Economics to Stock Analysis
  11. 11Industry Structure as Valuation Anchor
  12. 12Scarcity, PPF, and Opportunity Cost
  13. 13Marginal Analysis: How Disciplined Investors Decide
  14. 14Consumer and Producer Surplus: The Geometry of Value Capture
  15. 15Price Discrimination: First, Second, and Third Degree
  16. 16Game Theory and the Prisoner's Dilemma
  17. 17Externalities and Public Goods
  18. 18Comparative Advantage: Why Specialization Compounds
  19. 19Behavioral Economics for Investors
Continue this lesson in the app →See it on a real ticker →