We’ve all heard the phrase “Time is Money”. But what does it really mean and why does it matter in the discounted note business? Here’s the short and simple answer!
Money today is worth more than money tomorrow due to its ability to earn interest. The Time Value of Money concept puts a price on the amount of time an investor has to wait for an investment to mature.
To illustrate, if someone offered you $50 cash today or $100 cash in 30 years, what would you choose? Most of us would instinctively take the $50 today because we know that the buying power of $50 today is going to be greater than the $100 way out in the future.
But what if someone offered $50 cash today or $100 cash TOMORROW? We might now be willing to wait a day (assuming we knew we’d get paid). What changed? The amount of time that had to pass!
Of course this is a simplified example and it takes a mathematical formula and the help of a financial calculator to make exact calculations. Just know the way time affects the value of money in combination with the note interest rate and the investor’s desired return will play an important role in how much that investor will discount the price of a note.
It just doesn’t seem fair to leave all the secrets to making money in the hands of the big time investors. So, be sure to visit https://noteinvestor.com/category/notes-101/ for more examples and ways to calculate the present and future value of money to your benefit!
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