Why is waiting for the money more expensive than you think?

TL;DR The concept of the time value of money (TVM) tells us that receiving a sum now is better than waiting for the same amount later. Why? Because you can invest that money today and generate returns. This idea also works in reverse: you can calculate how much a future payment promise is truly worth today. All of this can be measured through mathematical equations. In practice, factors like compound interest and inflation need to be considered when making financial decisions based on this concept.

Why Time Changes the Value of Your Money

Everyone has a different relationship with money. Some save rigorously, others spend as they receive. But there is a universal truth when it comes to timing: the value you assign to money changes depending on when you receive it.

This is a practical question many face. Would you prefer to earn a smaller bonus tomorrow or a larger one in six months? This seemingly simple question hides a well-structured financial logic that you can learn to use to your advantage.

Understanding the Fundamental Concept

The time value of money is a principle that states it is more advantageous to receive a sum today compared to the same sum in a future period. The reasoning behind this involves opportunity cost.

When you decide to delay receiving money, you automatically lose investment or application opportunities for that resource. Let’s look at a concrete example.

Suppose you loaned $5,000 to an acquaintance a few years ago. Now, this person has contacted you saying they want to settle the debt. They offer two options: hand over the $5,000 this week or wait eight months to receive the same amount.

Even if you’re not in a hurry, from the perspective of the time value of money, it would be more advantageous to receive it today. You could deposit this amount into a savings account with interest or invest in some asset that generates gains. Additionally, another critical factor is inflation, which will reduce the purchasing power of that money over the eight months. Those $5,000 will buy fewer things in eight months than they do today.

A natural question arises: how much would your acquaintance have to offer after those eight months for waiting to make sense? At minimum, it would need to compensate for the gains you would forgo during that period.

The Mathematical Side: Present versus Future

This logic can be expressed through specific calculations. We need to examine two scenarios: the present value of money in the future and the future value of money you have now.

The present value answers the question: how much are those $5,000 you will receive in eight months worth today? This calculation considers current market rates.

The future value is the inverse question: if you receive $5,000 today, how much will that money be worth in eight months considering investment opportunities?

Both calculations form the core structure for making better financial decisions.

Calculating How Much Your Money Will Grow

Let’s work with real numbers. Imagine the available yield rate is 3% per year. If you receive $5,000 today and invest that amount, what will be the total in eight months?

The formula is simple:

FV = $5,000 × 1.03^(8/12) = $5,100

Here, FV means “future value.” The result shows that your money would grow to $5,100.

Now let’s extend this scenario. What if the term was two years instead of eight months?

FV = $5,000 × 1.03² = $5,304.50

In both cases, we apply the concept of compound interest, where previous gains also generate new gains.

The general formula works like this:

FV = I × (1 + r)^n

Where I is the initial amount, r is the yield rate, and n is the number of periods.

Knowing how to calculate future value is essential for financial planning. You can estimate precisely how much that money will grow.

The Inverse: Discovering the Real Value of Future Promises

Sometimes the situation is reversed. Someone promises to pay $5,300 in eight months. You want to know if this offer is really better than receiving $5,000 today.

For this, we calculate the present value of that future promise:

PV = $5,300 / 1.03^(8/12) = $5,193

The calculation reveals that that promise of $5,300 in the future is equivalent to only $5,193 in current money. This means that yes, the offer is more advantageous than the immediate $5,000. You would effectively gain $193.

The general formula for present value is:

PV = FV / (1 + r)^n

Note that this formula is simply the inverse of the future value calculation.

How Compound Interest Amplifies Your Gains

Compound interest works like a snowball that grows as it rolls. A small initial amount can turn into something much larger over the years, compared to situations where only simple interest is applied.

Suppose you invest $2,000 at a 2% annual rate, with interest calculated annually:

FV = $2,000 × (1 + 0.02/1)^(1×1) = $2,040

But what if the interest was compounded quarterly, i.e., four times a year?

FV = $2,000 × (1 + 0.02/4)^(1×4) = $2,040.30

The difference is small in one year, but consider a 20-year horizon. This small quarterly advantage accumulates significantly.

The adjusted formula is:

FV = PV × (1 + r/t)^(n×t)

Where t represents how many times per year the interest is compounded.

The Silent Impact of Inflation

So far, we focused on yield rates, but there is another crucial factor: inflation. What’s the use of earning 2% per year in interest if inflation is at 4%?

In periods of high inflation, the purchasing power of your money decreases. That $1,000 you have today will buy fewer products or services after 12 months if inflation rises. This is particularly important in salary negotiations, where the proposed increase needs to at least keep pace with inflation.

The difficulty lies in predicting inflation. There are various indices that measure the price variation of goods and services, and they often reach different conclusions. Moreover, inflation is notoriously unpredictable.

This means we have little control over it. We can include a discount factor for inflation in our calculations, but recognize that any projection will be an estimate.

Applying This Knowledge in Cryptocurrencies

The crypto sector offers multiple opportunities where the concept of the time value of money is directly applicable.

Consider staking: you can keep your coins liquid or lock Ethereum (ETH) for six months in exchange for 2% annual yield. Which choice makes more sense? With the calculations of the time value of money, you can compare this return with other staking opportunities available and choose the best.

Another common situation: you are thinking of buying Bitcoin (BTC). The question arises: should you buy $100 in BTC today or wait until you receive your next paycheck?

Applying the TVM logic, the answer would be to buy now. However, Bitcoin works differently from traditional currencies. Its supply grows slowly until a saturation point, which technically means BTC currently has inflationary characteristics. But the price fluctuates constantly, making the decision more complex than the simple formula suggests.

For cryptocurrencies, you can use the concept of the time value of money to evaluate investment products, compare returns across different platforms, and plan your long-term portfolio.

Practical Conclusion

Although we have formalized the concept of the time value of money with equations and variables, you probably already use it intuitively in your daily decisions. Interest, yields, and inflation are constant economic realities.

For large companies, professional investors, and lenders, mastering these calculations is critical. Small percentage differences can result in significant gains or losses.

For you, as a cryptocurrency investor seeking to optimize returns, understanding the time value of money is a concept that truly is worth the effort to learn. This knowledge drastically improves your decisions on when, where, and how to invest your resources.

Additional Resources

• What makes money valuable?
• Understanding Return on Investment (ROI)
• APY versus APR: which to use?