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    rock-onn's Avatar
    rock-onn Posts: 5, Reputation: 1
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    #1

    Apr 8, 2017, 05:30 AM
    Time valueof money
    The time value of money describes the greater benefit of receiving money now rather than later. It is founded on time preference. So value of money now is greater than value of money later(say an year). Value of time depreciates by time.

    In my opinion, Value of money depreciates only by inflation. But they don't discuss anything about inflation. Is there any theory that discusses time value and inflation?
    joypulv's Avatar
    joypulv Posts: 21,593, Reputation: 2941
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    #2

    Apr 8, 2017, 05:53 AM
    Time is a given. Having to give a concept of time and money a name is absurd to me. Might as well tell me that it's better to keep breathing than to hold my breath. (Of course there are plenty of individuals for whom getting money now rather than later is NOT the 'greater benefit' overall, such as someone collecting disability, or a child who doesn't like waiting to inherit, but who isn't taxed nearly as much if he waits.)

    Any discussion of any other factor such as inflation assumes time.
    So what you are asking for really is a theory of inflation.

    Now you have opened the whole can of worms of the complexities of how money is valued within the context of all social, economic, and personal conditions.
    Inflation means something very definable, but it's relevant in context, different, e.g., for a retired individual vs the Federal Reserve. And again, time is part of that discussion, or any discussion of money.

    So are you planning to be an economist? Best job in the world. You don't even have to be right. Just good at talking the talk.
    rock-onn's Avatar
    rock-onn Posts: 5, Reputation: 1
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    #3

    Apr 8, 2017, 06:22 AM
    I am studying for finance and hence dealing with some economic theory but not in depth. I find economic theory very interesting. I don't mind being an economic thinker. As you replied I should be good in talking.

    Why does money value depreciate by time?

    In my opinion, it depreciates because of inflation. Why should some charge interest so high for time preference? I am not getting it.
    joypulv's Avatar
    joypulv Posts: 21,593, Reputation: 2941
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    #4

    Apr 8, 2017, 07:20 AM
    'Charge' interest, as in a loan? Because of risk. In times of low inflation, we expect low interest paid on savings and low interest charged on loans, but some lenders charge high interest regardless. A typical example is credit cards, which experience a lot of losses (not enough in my book to warrant the rates they charge). NEVER carry credit card debt!

    BUT in times of low interest, FINANCE everything you possibly can, from cars to houses.

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