Time Value of Money

The time value of money is an economic concept based on the principles of both investing and inflation. In practical terms, it means that a dollar given to you today is worth more than a dollar you receive one year from now. This is true because if you receive the dollar now, you can invest it and earn interest and potential gains, increasing the value of the original dollar. On the other hand, a dollar given to you one year from now will be worth exactly that - one dollar. And, because inflation erodes the purchasing power of money over time, the dollar you receive one year from now will actually be worth less than the dollar you received the year before.

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