- June 14, 2020
Theprinciple of time value of money is taught in almost all businessschools. The main reasons behind this phenomena are that money can beinvested and earn interest and likewise, money can experienceinflation hence reducing the spending power and making it worthlessin the future. Also, there is a probability that one might not haveaccess to money in the future. The collective spheres where rationalecan be applied include mortgages, student loan, savings, retirementplans and investments among others.
Acase scenario that I would like to use in my personal life is to savefor the purpose of educating my children. Calculating the amount tosave for education requires the application of time value concepts.Pure mathematics is not enough due to changing factors such asinflation and interest. The rate of money value change is notconstant and so is the source of income (Kaveh & Dalfard, 2012).Saving for a college education, in this case, would, therefore,require proper planning. If the child will join University ateighteen years of age, then one has approximately 18 years to save.However, the cost of education is likely to be higher than thecurrent price in the future hence the need to consider inflation. Bydoing this, the future value of college education will be known andlikewise the amount to be saved per month.
Toensure the realization of a financially sound future, I wouldconsider the power of interest against saving in a non-profit orlittle interest account. As such, it is wiser and more profitable toinvest in Certificates of Deposit, 529 plans and any other investmentopportunity that will not only facilitate optimum saving for thechildren’s education but also increase returns over the years. Inthis manner, the power of compound interest will make the earlysaving a worthy course.
Kaveh, M. & Dalfard, M.V. (2012). A study on the effect of inflation and time value of money on lot sizing in spite of reworking in an inventory control model. Tehnical Gazette, 819-826.