What does the time value of money principle state?

The time value of money principle asserts that a dollar received today is worth more than a dollar received in the future. This concept is grounded in the idea that money has the potential to grow over time due to interest or investment returns. When you have money now, you can invest it, earning returns that will increase its value. Conversely, if you receive a dollar in the future, that future dollar does not have the same immediate purchasing power as a dollar today.

This principle also emphasizes the impact of inflation, opportunity cost, and the ability to earn interest. Money can lose purchasing power over time due to inflation, meaning that a dollar received later could buy fewer goods and services than a dollar today. This financial principle is essential for making decisions related to investments, loans, and savings, highlighting the necessity of considering not just the amount of money, but also when it is received.