There is the general saying that a bird in hand is worth two in the bush. For instance, if you had to choose between receiving =N=400,000 now and =N=40,000 in installments over a period, which would it be? Very likely, the choice would be to receive the bulk sum now. What if the stakes changed and you had to choose between =N=400,000 now and =N=420,000 which is a five percent increase in the sum, a year from now? Your choice would depend on some factors like your current need for the money, if you had an investment option that could give you more returns over the same period, etc.
A major principle which financial experts advise to consider in making your decision is the time value of money. This principle explains that money currently available to you now if invested, is worth more than if you received the same sum at a later date. A major rationale guiding this is that the value of money changes based on economic factors, especially inflation. For instance, if you had =N=10,000 left dormant in your account for 12 months without gaining any interest on it and inflation rates increased by 3 percent during the same period, the value of that sum would have decreased by 3 percent at the end of that period and so would its purchasing power.
The time value of money principle encourages having money now and investing it as a means to beating such economic factors, thus retaining the value of your money and possibly growing it in the long run. The application of this principle is especially important if you plan to meet up with your financial needs and goals. These needs and goals range from personal finance needs like maintaining a favorable standard of living to corporate financial goals like boosting profits.
Determining this value is usually through a formula, which could vary, depending on the scenario to which it is applied. Some variables have to be considered in calculating the time value of money. They include things like how much the sum you have is currently worth, the size and timing of your cash flow, how long you intend to keep it, etc.
In essence, this principle is only useful where money is actually invested. It is always a better plan to invest money currently available to you, instead of allowing it sit idle because investing helps to grow your income as well as retain the value of your principal sum. Be smart about your financial decisions because time is money.
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