Time Value of Money or Money Value of Time?

by: Stephen Hanjaya


The term 'Time Value of Money' is a famous term in the financial world.¹ Time Value of Money (TVM) is an important and fundamental concept in financial management,² especially budgeting and investing.³ There are also term 'Money Value of Time' acknowledged by some people, but its famosity is way behind the "Time Value of Money."⁴


Time Value of Money contains the idea that money available at the present time is worth more than the same amount in the future, due to its potential earning capacity.⁵ This core principle of finance holds that, provided money can earn interest, any amount of money is worth more the sooner it is received. Also referred to as 'present discounted value.'⁶


While there are unanimous consent on the definition of the Time Value of Money,⁷ there are different acknowledgement on the term Money Value of Time. What is Money Value of Time? Is it really different from Time Value of Money?


Some said that the concept beneath Money Value of Time is simply, as an old saying goes, 'Time is Money.'⁸ Others said that money value of a time price equals the amount of money a person can sacrifice to "buy" that time, and for example, a person whose wage rate equals $20 per hour would value of 30 minutes of time at $10 (and would value 2 hours of time at $40).⁹ As a conclusion, it is not wrong to say that Money Value of Time is really the formula of Time is Money.


Most people take the 'Time Value of Money' concept for granted, accept it as it is, and introducing 'money value of time' concept as something different than 'time value of money' concept.¹⁰ I cannot agree to, or accept it.


Back to the definition and explanation of 'Time Value of Money.' If we are borrowing US$ 100, and we should pay the simple interest of 1% per month, after 10 month, we should return:

US$ 100 + {10 month x (1% x US$ 100)} = US$ 110.

Let's look at the real fact. Why would a Bank loan us US$ 100 for I% monthly interest? Why wouldn't a Bank loan us US$ 100 without interest? The most, why we would rather borrow now from the Bank, US$ 100 with I% monthly interest, instead of not borrowing from the Bank, and waiting until we have our own money US$ 100 to setup a business? Yes, because we do not have time to lose!!


Assume that, we want to setup a US$ 100 business with a 2% monthly net profit. Let's say we do not have US$ 100 in our pocket now, and if we save enough, we have to wait for 10 months to have our own US$ 100. After we have that money, then we setup the business and start to earn net profit of 2% monthly.


Now, how about if we borrow US$ 100 from the Bank with 1% monthly simple interest. By borrowing from the Bank now, now we already have in our hands the US$ 100 and could start our business now, instead of starting it in the next 10 month.


Because we started the business now, we start to gain the business' 2% net profit monthly. After 10 months, what we got in our hands is business capital and accumulated profits minus loan and accumulated interest. That is:

{$100 + {10months x (2% x $100)} - {$100 +{10months x (1% x $100)}= $10

We gained US$ 10 more than if we started the business 10 months later.


By borrowing, we could start the business as if we have the money now. It is like fast forwarding our business. In this example, we fast forward our business 10 month. To gain the US$ 10, we have to start and run a business for 10 months. To start the business 10 months earlier, we have to pay US$ 10 to the Bank. For me, it is very clear, that the interest is used to pay the time that the business supposed not to have.


The interest is the price to buy time. Time bought by money, not money bought by time. So, it is clear that 'Time is really Money,' and that is the 'Money Value of Time.' As a final conclusion, the term 'Time Value of Money' is a twisted term, and people must use the term 'Money Value of Time' as the proper term.


Additional Note

To define: "a person whose wage rate equals $20 per hour would value of 30 minutes of time at $10 (and would value 2 hours of time at $40)," as an example of 'The Money Value of Time' is not accurate. Wages cannot be used as an example of 'Money Value of Time.' Wages is not the pure price of time.


Wages is not the pure price of time because to gain salary, an employee must give:

1. Performance, that is the work of the employee itself, and
2. The employee's time in order to perform her work.

Those 2 elements of a work is unseparatable. Moreover, time is a very personal thing. It attaches to the person only. The value of time is relative and subjective. It depends on how the person perceives its value.


So, what do you think?

PS: Comments and corrections are very welcomely invited.
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¹Just search it via the search engine like Yahoo! or Google, and you will know how famous it is. Just type (without quotation marks): time value of money.

²"time value of money." Get Objects. Cedar Spring Software, 1998-2002. getobjects.com 31 Jan. 2007. http://www.getobjects.com/Components/Finance/TVM/concepts.html
"time value of money." Money Terms. Money Terms. moneyterms.co.uk 31 Jan. 2007. http://moneyterms.co.uk/time-value-of-money/

³"personal budgeting: time value of money." AOL Money & Finance, 30 Mar. 2005. money.aol.com 31 Jan. 2007. http://money.aol.com/budgeting/fct1/_a/personal-budgeting-time-value-of-money/20050325140809990001

⁴Again, to proof it, just search it via the search engine. Just type (without quotation marks): money value of time. You could see that some or even more of the results are referring to the term "time value of money."

⁵'time value of money." Investopedia, 2007. Investopedia.com 31 Jan. 2007. http://www.investopedia.com/terms/t/timevalueofmoney.asp
"time value of money." Dictionary of Real Estate Terms. Barron's Educational Series, Inc, 2004. Answers.com 01 Feb. 2007. http://www.answers.com/topic/time-value-of-money

⁶'time value of money." Investopedia, 2007.

⁷See other definitions on Time Value of Money:
- "time value of money." Encyclopedia of Business and Finance. The Gale Group, Inc, 2001. Answers.com 01 Feb. 2007. http://www.answers.com/topic/time-value-of-money
- McCracken, Mark. The time value of money. Teach Me Finance, 2005. teachmefinance.com 16 July 2005. http://www.teachmefinance.com/timevalueofmoney.html.
- "time value of money." Wikipedia. Wikipedia, 2007. Answers.com 01 Feb. 2007. http://www.answers.com/topic/time-value-of-money
- "time value of money." investorwords. WebFinance, Inc., 2007. investorwords.com 31 Jan. 2007. http://www.investorwords.com/4988/time_value_of_money.html

⁸"Time is money," is an old saying. See: Ramachander, S. "The Money Value of Time." The Hindu Business Line, 21 Aug. 2006. thehindubusinessline.com 31 Jan. 2007. http://www.thehindubusinessline.com/manager/2006/08/21/stories/2006082100761100.htm)

⁹econ.rochester.edu 01 Feb. 2007. http://www.econ.rochester.edu/eco108/ch6/supp6.htm#money%20value%20of%20time%20price

¹⁰See:
- Fawkner, Elena. The Money Value of Time. Better Budgeting, 2002. BetterBudgeting.com 31 Jan. 2007. http://www.betterbudgeting.com/articles/homebusiness/moneytime.htm
- Sakazaki, Lloyd. Picking the Internet Leader Using Money Value of Time. Lloyd's Investment Blog, 18 Apr. 2005. lloydsinvestment.blogspot.com 01 Feb 2007. http://lloydsinvestment.blogspot.com/2005/04/picking-internet-leader-using-money.html
- Imperato, Gina. The Money Value of Time. Fast Company, issue 31, December 1999. FastCompany.com 31 Jan. 2007. http://www.fastcompany.com/online/31/rftf.html: "We all understand, instinctively, the timeless logic behind the 'time value of money' -- that a dollar received today is worth more than a dollar received a year from now. But the new world of business requires an instinctive appreciation of a different logic as well. Think of it as the 'money value of time.' Cutting-edge people and companies are rethinking the nature of their relationship with time. To them, time is every bit as tangible, every bit as measurable, and every bit as valuable as money. ... The way to assess your ability to compete in Internet time is to ask yourself how creatively you use time. ... Your excess time -- your unused capacity -- is perishable. You're converting time into a new form of money! ... Time is precious. You can't get back the time you wasted yesterday. Those who can extract value from their excess time will make a huge impact on their business."