When you gauge the value of money depending on a comparison between the present and a point in the future, it is called utilizing the Time value concept of money which guides all monetary transactions and is also involved in discount buy. Time value concept is also used to grow money and ensure a stable future after retirement.

As the name of the concept goes, it is easy to gauge the fact that the time value of money involves a time based comparison of the value of the dollar at the present time to a certain point in the future. This future reference point could be somewhere between six months, two years or even as long as twenty years from the current point in the present.

The concept bases itself on the idea that the value of a dollar today is much more valuable than the same received at a point of time in the future. It bases itself on the current inflationary trends that dominate the world economic scenario today. In the face of such continued trends the value of the dollar is bound to take a drop. The theory blames the cause of such inflation on the spendthrift tendencies of the government. In the larger picture the issue of inflation gains a larger significance with the increasing amounts of time and money that get involved.

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The following chart shows the future value of $1000 at different inflation rates over time.

Compound Interest We can use the same principle of the time value of money to work for us to counter inflation. We do this through earning interest on our money at a higher rate than the inflation rate. This principle works the same way when you use it to make your money grow, and is the easiest way to make money.

The concept of growing money is called compounding. You take a certain amount of money, invest it, earn a return on the investment, and then reinvest your initial investment amount and earnings over a period of time. You keep turning the money over and as this base amount grows, so does the amount it earns in interest. This is illustrated in the following chart.

Year Amount Interest Total Value of Invested Earned Investment

1 $1,000.00 $50.00 = $1050.00

2 $1,050.00 $52.50 = $1102.50

3 $1,102.50 $55.13 = $1157.63

4 $1,157.63 $57.88 = $1215.51

5 $1,215.51 $60.78 = $1276.29

However, there are other ways in which the growth of money can be estimated on an average. The first rule is called Rule of 72. This is the shortest and easiest methods to find out how long a period of time it will take to double the initial amount of money you have invested. The method is simple. Divide the number 72 by the rate of interest that you are earning and you will get the number of years it will take. Therefore, investing a thousand dollars at 12% would mean that you it would take six years to double your money.

Another little trick to learn in how long your money will be tripled is by the rule of 112. This is a similar method. Just divide the number 112 by the rate of interest that you are getting to get the number of years. Thus if you take the aforementioned amount and the divide 112 by 12%, it will take approximately 9 years to triple that amount of money.

The time value of money is crucial to the discount buy business because in this industry, deals revolve around the concept of paying cash today to receive cash in the future, definitely the easiest way to make money.