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The financial principle that a sum of money is worth more today than the same sum in the future due to its potential earning capacity.
The time value of money is one of the most fundamental concepts in finance. A dollar today can be invested and earn interest, making it worth more than a dollar received in the future. This principle underpins nearly all financial calculations, including net present value (NPV), internal rate of return (IRR), bond pricing, and stock valuation. If you can earn 5% per year, $1,000 today is equivalent to $1,050 in one year, or $1,276 in five years. Conversely, $1,000 received five years from now is worth only about $784 today at a 5% discount rate. This is why early investing is so powerful: time amplifies returns.