Chapter 4. TVM impact on debts

On multiple occasions, you have to make financial decisions that prevent you from investing and taking advantage of the time value of money concept. This is also known as the opportunity cost of choosing a certain decision over another possible choice. Understanding the impact of the time value of money on debts would help your decisions. 

 

How to

You may have heard the following in your economics class: "You cannot have your cake and eat it too." This is the opportunity cost on a platter. You either have your cake or you eat it, but it is impossible to do both at the same time. This concept applies to your personal life as well as your financial decisions.

Prior to making any purchasing decisions on credit, you need to ask yourself these questions:

1. Is the item worth the extra payments (plus interest) I will have to make to pay it off?
2. Is the opportunity cost of giving up the potential earning of interest acceptable for my financial goals?
3. Is acquiring the desired item on credit is more meaningful to my financial freedom and security than saving and investing?

 

Understanding the time value of money and its impact on debts can help you make better financial decisions and will allow you to reach your personal and financial goals.

 

Practice

Now that you understand the impact of TVM on debts, think of paying it forward and discuss your findings with a friend or a family member.

 

Congratulations! You can move on to Chapter 5. TVM impact on investments

To review the full module on Time value of money, click here.