On paper, financial decisions such as loans and insurance plans might seem daunting and difficult to decide. However, they don’t have to be. All you need is this simple formula.
Words by Sebastian Haq
Would you choose S$1,000 today or S$1,000 in three years?
You would instinctively go for S$1,000 today rather than receiving the same amount of cash three years later. But, is there any argument for why you would prefer to receive the cash today other than because you want to beat inflation?
This concept is called time value of money. The idea is that the money available today is worth more than the same amount of money at a later date due to the earning power of the money today. This concept is applicable not just for calculating loans but can be used in a wide spectrum of financial decisions such as insurance plans, investments, etc.
The Formula of Time Value of Money
Back to the S$1,000 example. When you deposit the money into a savings account, you earn interest on our deposit. By the time three years has passed, you would have earned three years’ worth of year-on-year interest on your …read more