IF YOU study any formal course in finance it won’t be long before you are faced with the concept of “time value of money”.
What it means is that there is a cost to the delay in receiving money and so we say that ‘a dollar received today is worth more than a dollar received in the future’.
There are two reasons why it is better to receive a dollar today than a dollar in the future.
First, if you receive a dollar today, then you can invest it and get an additional return.
Second, there is always a risk that you will receive less than promised, or nothing at all.
So you might consider accepting 97 cents now, rather than $1.00 in a year’s time. If with certainty, you could earn three cents in interest over the year, then (taxes aside) you would be just as well off taking the 97 cents now, as waiting a year for your $1.00.
If you could pay off a loan, say a credit card, with the money received now, you might be as well off taking 85 cents now, rather than wait a year and pay credit card interest.
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