Time Value of Money - Personal Finance Shorts -1

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One day a mutual fund agent called me and said, 'Sir, please do an SIP of 5000 per month till you retire. I promise to give you 1cr when you retire.'


I replied, 'Rather, give me a crore today and I will pay you 6000 per month until I die.'


He then cut the call.


If you carefully understand the situation, then certainly you will realize that 1 crore today is worth much more than 1 crore some years from now. Because if you have 1 crore today and if you put into a FD, you'll probably earn about 6 lakh per annum after taxes i.e. 50000 per month. In such a way, if you keep on accumulating the interest earned on 1 crore for some years. Your 1 crore today will be worth much more than 1crore in some years from now. 


A rupee today is worth more than a rupee some year from now. Simple because, because you can earn some interest on the rupee invested today.


This is the intuition behind the most fundamental concept of finance: The Time Value of Money.

This concept forms the basis of almost every valuation done in finance.

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