Glossary · Investing and personal finance
Time value of money
The time value of money is the idea that a dollar today is worth more than a dollar later, because today’s dollar can be invested and earn interest.
Also called: TVM, present value, future value, discounting
Discounted at the 10-year Treasury yield, 4.98% on November 10, 2026.
In plain words
Would you take $100 now or $100 in a year? Almost everyone says now, and they are right. Put the $100 in a savings account at 5% and in a year it is $105. So $100 a year from now is worth less than $100 today: about $95.24, the amount that would grow to $100 at 5%. That is the time value of money.
Turning a future amount into today’s value is called discounting, and the answer is its present value. Going the other way, from today to the future, gives the future value: that is compound interest.
The higher the interest rate and the longer the wait, the less a future dollar is worth today. At the 10-year Treasury yield of 4.98%, $1,000 promised in 10 years is worth about $615 today.
Example
$1,000 today or $1,000 in 5 years?
Say your money can earn 5% a year.
- $1,000 today grows to $1,000 × 1.055 = $1,276 in 5 years: its future value.
- $1,000 paid in 5 years is worth $1,000 ÷ 1.055 = $784 today: its present value.
- So a promise of $1,000 in 5 years is only as good as $784 now. $850 today is worth more: it grows to $1,085 by then.
Make it 10 years and the same $1,000 is worth $614 today at 5%, or $463 at 8%.
One level deeper
The two formulas: future value = present value × (1 + r)n, and present value = future value ÷ (1 + r)n, where r is the rate per period and n the number of periods. A stream of payments, such as a pension, a bond or a rent, is valued by discounting each payment and adding them up.
This is how almost everything in finance is priced. A bond’s price is the present value of its coupons and its face value; a stock is often valued as the present value of the cash it will pay its owners. When interest rates rise, the present value of far-off money falls, which is why rising rates hit long bonds and fast-growing companies hardest.
Inflation is one reason money now beats money later, but not the only one. Even with no inflation, money today can be invested, spent or kept as a safety net, and a promise of money later might not be kept. The discount rate covers all three: expected inflation, a reward for waiting and the risk.
What $1,000 paid in the future is worth today
The longer you wait and the higher the rate, the less a future payment is worth now. At 8% a year, $1,000 paid in 30 years is worth less than $100 today.
The numbers behind the chart
| Date | Discounted at 2% a year | At 5% a year | At 8% a year |
|---|---|---|---|
| Year 0 | $1,000 | $1,000 | $1,000 |
| Year 5 | $906 | $784 | $681 |
| Year 10 | $820 | $614 | $463 |
| Year 15 | $743 | $481 | $315 |
| Year 20 | $673 | $377 | $215 |
| Year 25 | $610 | $295 | $146 |
| Year 30 | $552 | $231 | $99.38 |
Why it matters
It is the logic behind every loan, mortgage, bond and pension: comparing money that arrives at different times.
It explains why a lottery prize of “$1 million paid over 30 years” is worth only about half of $1 million in cash today, at 5% a year.
It is why rising interest rates push down the prices of bonds, stocks and houses: the same future money is worth less today.
A common mistake
Myth: Money now is worth more than money later only because of inflation.
In fact: Inflation is part of it, but even with prices standing still, a dollar today can be invested to earn interest, and a dollar promised later carries the risk that it never arrives. Both are priced in.
Questions people ask
What is the formula for present value?
Present value = future amount ÷ (1 + rate)years. $1,000 in 3 years at 4%: $1,000 ÷ 1.043 = $889.
What discount rate should be used?
The return available elsewhere with similar risk. For a safe government promise, a Treasury yield: the 10-year yield was 4.98% on November 10, 2026. Riskier money is discounted at a higher rate.
Is a lump sum worth more than payments over time?
Compare their present values. $1 million paid as $33,333 a year for 30 years is worth about $512,000 today at 5% a year, so at that rate any lump sum above about $512,000 is worth more.
Read more on BigCapital
About the numbers
- The numbers on this page are recalculated from the data every night; the sources are listed at the end of the page.
- US Treasury par yield curve rates: U.S. Department of the Treasury, Daily Treasury Par Yield Curve Rates (Interest Rate Statistics).
- This page explains a term. It is not investment advice.