Opravy

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• As we all already know, the time value of money is the concept that money you have now is worth more than the identical sum in the future due to its potential earning capacity.

• This core principle of finance holds that provided money can earn interest, any amount of money is worth more the sooner it is received.

• Liquidity, in turn, creates choices.

• Liquidity is the correlation between how quickly can an asset could be sold and at which price.

• Cash is the most liquid of assets because it can be immediately exchanged in a market.

• Your $1000 today is always worth more than $1000 tomorrow because of the possible interest that it could earn during a period of time.

• Let’s say you had a choice receiving $1200 as your pocket money for a whole year today instead of receiving $100 per month during the year.

• Even the amount of money is the same receiving the whole sum now creates choices.

• For example, you can spend them on consumption and buy some expensive things such as X-box, so enjoy video games now instead of waiting and collecting this money for a couple of months until you buy it.

• Or you can loan this $1200 to your friend with 5% of interest.

• Thus, after one year you will receive $1260 ( this means you not only get your money back but additionally this $1200 earned you $60 of profit).

• This is an example of how the expression “a bird in the hand is worth two in the bush” could be relevant to the concept of the time value of money.