Time Value of Money: What It Means and Why It Matters

Category: Savings and Goals
07/31/2025

The time value of money (TVM) is a concept that explains why a dollar received today is worth more than the same dollar received in the future.

This is because a dollar received today can be saved or invested to earn interest over time. As a result, the dollar you receive today can grow in value, making it worth more than the same dollar in the future. 

On top of that, inflation causes prices to rise over time, which means the dollar you receive in the future will buy less than it would today. So not only does your money miss the chance to grow, but it also loses purchasing power as things get more expensive.

Let’s take a closer look at how this works. 

Imagine you have $800, and you want to buy a new iPhone in the next year or two because your current one is getting old. You have two options: Save it or spend it.

Save $800

If you choose to save your money for just a year, here’s how much it would grow:

$800 × 1.04 = $832
This assumes you deposit your money ($800) in a 12-month certificate that earns 4% APY*.

At the end of the year, you’d have $32 more, just for saving.

Now, let’s consider the price increase of the iPhone. If inflation causes the price to rise 2% during the year that you’re saving your money, the new price would be:

$800 × 1.02 = $816

So, one year later: 
•    Your savings would have grown to $832
•    The iPhone would cost $816

This means you could buy the new iPhone and still have $16 left. That’s the power of the time value of money—your money grows faster than prices rise.

Spend $800 

If you choose to spend your money immediately, your money wouldn’t grow, and you’d pay the current price. 

$800 - $800 = $0

You could buy the new iPhone, but you wouldn’t have any money left over. 

How to Be a Smart Shopper

The time value of money can help you grow your money by waiting just a bit to spend it on the things you want. The next time you’re ready to make a purchase, ask yourself these questions:

  • Do I really need this now, or can it wait?
  • Is there a more affordable option that meets my needs?
  • Is this a need or a want?
  • Can I find it used, borrowed or shared?
  • Will this purchase help me save money in the long run?
  • Is saving better than spending in the current economy?

Answering these questions will help you make smart financial decisions that help you save and spend at the right time. And if you’re ever unsure about what to do, we’re here to help. Send us a chat, give us a call at 800.856.7328 or visit your local branch. We’ll be happy to help. 

Making the Most of Your Money

Each time you pause to evaluate a purchase, you create an opportunity to keep more money in your pocket! While it may feel like waiting on a big purchase, passing on a treat or choosing a less expensive option is a step backward, it’s really a step forward. By making the most of your money, you’re taking the next step in your journey to financial well-being.

*APY = Annual Percentage Yield