What does the time value of money concept state?

The concept of the time value of money asserts that a sum of money has greater value today than it will have in the future due to its potential earning capacity. This principle is rooted in the idea that money can be invested to generate returns over time, meaning that money today can generate interest or gain value, whereas the same amount in the future will not have the same purchasing power or investment potential.

For example, if you have $100 today and invest it at an interest rate of 5%, in one year you would have $105. Conversely, if you receive $100 a year from now, you miss out on that earning potential. Thus, the value of money today is higher than its value at some point in the future when considering the opportunities for investment and growth. This concept is central to financial decision-making, impacting savings, investments, and even loan structures, as it emphasizes the importance of timing in the value of money related to financial returns.