The time value of money is perhaps the single most important concept in finance.
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The time value of money is perhaps the single most important concept in finance. It is everywhere, but what is it? If you have not already done so, please watch the “Becoming Warren Buffet” video, located in the readings for this module.
No one would dispute that Warren Buffett is a phenomenal investor. However, not many know his real secret to accumulating fortune: his investment has been compounding for over 60 years. His wealth illustrates the power of the time value of money.
The time value of money is perhaps the single most important concept in finance. It means that a dollar received today is more valuable than a dollar received tomorrow or one year from now. The concept of time value leads to the concept of the opportunity cost. The cost is the next best alternative to the choice you chose. For example, if you quit your job to attend school full time, your opportunity cost is the salary you give up.
Describe your personal example(s) of the time value of money or opportunity cost. Try to explain either concept to non-finance majors. What examples can you think of in your career field?