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  • Writer's pictureStephen H Akin

Time Value of Money

The time value of money calculates the advantages of having money now as opposed to

having the same amount later. It is determined by your preferred timing for receiving money on a timeframe.


Interest is paid because of the Time Value of Money. To make up for the time value of money, interest is paid to lenders and depositors on debt as well as to the depositor of savings accounts. In order to maximize profits, people and corporations arrange their resources while taking growth and risk into account.


Every financial and investment professional is aware of the importance of appropriately assessing possible investments when it comes to the power of knowing the Time Value of Money. Through the use of TVM, people can increase the value of their hard-earned money by investing or saving it now rather than waiting until tomorrow. Many people rely on an understanding of time value when making informed judgments since it is crucial for success to allocate money resources wisely.


Money can be used as an investing instrument in addition to being a way of exchanging products. Investors can make wise choices about their financial future by having a solid understanding of the Time Value of Money and its potential for growth. TVM offers useful information by carefully analyzing prospective returns and related risks.

Interest Concept And Its Function In TVM


Interest: What Is It?


Interest is a unique form of currency that represents the cost of having access to borrowed funds or the benefits associated with investing your hard-earned money. Interest, which is sometimes expressed as a percentage, motivates us to make wise financial decisions by asking how long we intend to put off using those funds and what kind of financial return it might generate.


What is the formula for interest?


The original amount borrowed or invested, the interest rate, and the length of time the funds were invested or borrowed are typically used to compute interest. Simple interest, compound interest, and yearly percentage return are only a few ways to figure out interest.


Albert Einstein referred to compound interest as the eighth wonder of the world!


Factors That Affect The Time Value Of Money

What Is Inflation?


Inflation is the general price increase over time and is measured by the Consumer Price Index (CPI). As prices rise, the purchasing power of money decreases, making it worth less in the future. This affects the time value of money, as money invested today will have less value in the future as a result of inflation.


TVM is also used to compare financial products, such as stocks, bonds, and savings accounts. By considering the time value of money, investors can determine which financial products are most likely to provide the best returns over a specific time horizon.


For sound financial decision-making, the time value of money is an essential concept. Knowing this critical component can help you reach your goals and turbocharge returns – no matter if you’re a veteran investor or taking that first step toward managing finances.


Considering the time value of your investments, you'll make sure every cent works hard for you.

Harvard Business School describes TVM this way:

Time Value of Money


Finance is inherently forward-thinking and describes a company’s current position based on its trajectory.


The time value of money (TVM) is a core financial principle that states a sum of money is worth more now than it will be in the future.

“If you want to understand what something is worth today, the only way to understand that is to look into the future,” Desai says in Leading with Finance. “Think about the economic returns—the free cash flows—as a way to understand what today’s values are. Something is only worth something today if it generates future benefits.”


Because of this, a specific sum of money’s value is dependent on how long you must wait before using it. The sooner you can use the cash, the more valuable it is.


The longer you must wait to use it, the more chances you miss to return your investment. To account for this when valuing a company, discount future cash flows to reflect their present-day values.


Desai calls this the “gold standard of valuation.”

To calculate TVM for a sum of money, use this formula to solve for its future value (FV):

FV = PV x [ 1 + (i / n) ] (n x t)

In the TVM formula,

  • FV = the future value of cash

  • PV = the present value of cash

  • i = interest rate

  • n = number of compounding periods per year

  • t = number of years

If you’re in a non-finance role, chances are you won’t need to calculate TVM or discount cash flows yourself, but understanding the time value of money can enable you to make decisions based on it.


This core financial principle is crucial in making financial decisions such as Selling Annuities, Structured Settlement payments and or insurance-type products.


"Cash Now"! or "You're Sitting on a Gold Mine"! We've all heard all of the advertisements suggesting you liquidate your payouts now. Remember, Selling a structured settlement is always a money loser 100% of the time.


A structured settlement is a financial arrangement between an insurance company and a person that arranges for the payment of court awards and lawsuit settlements in tax free installments instead of in a single payment. Each structure is created for the specific individual so that it’s valuable and helpful for them. The payment period and amounts will vary.


Structured settlements are now used in a wide variety of types of lawsuit settlements such as:

  • aviation

  • construction

  • auto

  • medical malpractice

  • product liability

Other uses for structured settlements are:

  • divorce

  • minor children

  • estate planning

  • tax planning

  • trusts

Structured settlements may include income tax and spendthrift provisions.


Your attorney and structured settlements professional invested time, effort and expertise in creating your individual settlement plan, so we recommend that any decision you’re considering to sell the payments be carefully and seriously considered. Often, it’s just better for your situation to keep your payments rather than sell them.


While the original settlement was set up with your future needs in mind, times change. So, you may be faced with the need to adapt to unexpected events in your life. That’s when selling part or all of your structured settlement may be a good option so you can get cash for structured settlement payments.


The Structured Settlement Protection Acts are laws in 49 states and the District of Columbia that exist to protect recipients of structured settlement payments from the predatory purchasing practices often associated with the sale of structured settlement payments. Specifics of the laws vary from state to state, but all protection acts reflect the same basic intent.


As a Registered Investment Advisor, Akin Investment will be happy to meet with the interested parties. We will provide a comprehensive review of the recipients financial condition and discuss the options that are available to them. At the conclusion of this review we will provide an "Independent Professional Advice" letter.


Independent Professional Advisors (IPAs) are certified financial services experts. The Settlement Protection Act 2002 defines the qualification for this role as professionals working as certified public accountants, actuaries or licensed professional advisors. Their expertise enables them to consider the pros and cons of a major financial decision and to provide you with a written recommendation.


Structured settlement recipients pursuing the sale of payments can meet with an IPA and receive a recommendation in favor of or in opposition to selling payments.


The cost will depend on which type of professional you turn to and their rates. Consultations (which include formal documents) can range from $500 to $1,500. Some buyers will reimburse sellers for this cost, but will not directly choose and pay for the IPA as this could result in a conflict of interest. Federal law prohibits the IPA from being affiliated with or employed by the settlement buying company. This protects the seller and ensures advice is impartial.


Sellers then bring the recommendation to court—if the letter endorses the transfer—when attending the required hearing that is part of the selling process. A judge considers the IPA’s recommendation as a factor in deciding whether or not to give approval.


In Mississippi:

The purchasers must advise the seller in writing to seek professional advice.

Structured Settlement Protection Act Mississippi copy
.pdf
Download PDF • 526KB

In South Carolina:

The purchaser must advise the seller in writing to seek professional advice. Transfers of structured settlements related to workers’ compensation benefits are not allowed.

Structured Settlement Protection Act”. South Carolina copy
.pdf
Download PDF • 525KB


 




Need help? I'll be happy to guide you. Remember Akin Investments is a fiduciary advisor. We sell no insurance or financial products.


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