4B. The Time Value of Money

This video discusses what is meant by the 'Time Value of Money' - a very simple concept that links an amount we have today to and an amount in the future for a given time period and with a given interest rate or return.

Category:

Education

Tags:

• saving
• investing
• Michael
• Fischer
• savingandinvesting.com
• time
• value
• of
• money
• present
• future

[NicosMind]

Sounds like youre saying if the interest rate is 3% then inflation is 3%. Is that right?

[savingandinvesting]

@NicosMind If the interest rate is 3% then that is the nominal interest rate - i.e. the one that you would see and speak about. Inflation could be 1% or 2% or any other percentage - if inflation were 3% then the real interest rate would be 0%, i.e. in real terms you would not be getting richer. This example is just about present and future values and these are all in nominal terms - it does not make any assumptions regarding interest rates. I hope that helps, Michael.

[freezazoid]

@NicosMind : yeah totally. I haven't properly researched the recent interest rates but i'm guessing the last few years has been about 5 or 6 percent. The figures the government claims is generally lower than the actual inflation rate. Seems like ten years ago I could buy a can of soda for about 50 or 60 cents... now it costs about a buck. you do the math.

[NicosMind]

@freezazoid Well its because "This video basically took a long time to say: 100 dollars now is the same as 100 dollars plus interest a year from now" is why i asked about inflation. Cause thats what he was getting at. That if you buy a bond with 3% interest all youve done is saved your purchasing power... Well almost preserves your purchasing power.

Plus i never trust government stats on inflation. Its always higher.

[freezazoid]

@NicosMind : No. He didn't get into inflation at all but the concept that he's talking about can be applied to inflation but in an inverse way: inflation hovers around 5 percent per year. So you should take that into account when making long term investments.

This video basically took a long time to say: 100 dollars now is the same as 100 dollars plus interest a year from now.