Why does money have time value?

In order to understand why money has a time value, we must first understand and able to relate the relationship between money-->earning power-->purchasing power-->time. Apart from that, we must also understand interest rate and inflation rate.

In simple terms, money is a commodity we earn to exchange with another commodity. As mentioned, money is a commodity (money to make more money) and the same goes to houses, cars, food, and so on (things that we buy).

The idea of making money from money is to invest money in order to generate more money. We invest/save our money (initial amount) and interest will be added to the initial amount after a period of time. Interest here is defined as the cost of having money available for use. The cost of money being invested/ saved here is measured by interest rate (percentage addition over a period of time). Now, the whole idea mentioned is what we call earning power. To make it simpler, money gives us power to earn more. As for purchasing power, it is simply defined as having the ability to purchase or acquire something with an amount of money.


When we relate earning power and purchasing power, we will see that both react differently over a period of time. When we invest in a longer period of time, we will earn more money. However, over a longer period of time, our purchasing power decreases (as comparison with real world inflationary economy). For example, RM100 that we invest in a bank will become RM200 after 10 years. However, RM100 today can buy you 10kg of meat but the same RM100 can only buy 6kg of meat in 10 years to come.

Thus, we can see that to the concept of time, money has both purchasing and earning power. You’ll either make more or lose more money over a period of time, which is why we say money has a time value.