The financial concept of "the time value of money" is now in the spotlight, thanks to President Donald Trump's complaint about The New York Times's expose of alleged tax schemes that bolstered his fortune.
The article claims Mr. Trump received far more wealth from his father than he has divulged — $413 million in today's dollars, by the Times's accounting. Mr. Trump on Wednesday criticized the piece for what he claims is the use of "the time value of money," among other complaints.
Although the precise nature of Mr. Trump's objection is unclear, a closer look at the concept of the time value of money suggests what he might be getting at.
What is the time value of money?
The time value of money is the idea that money in hand is worth more than the same amount of money in the future. In other words, $1,000 is worth more to an investor now than in a month, year or or other period of time because she can start earning a return immediately. That interest will compound over time, increasing the value of the original $1,000.
The concept is fairly intuitive, since everyone who invests can understand that money available to put to use now has the potential to generate a greater return than money they don't yet have to sock away.
How is it used in business?
For one, the time value of money underscores much of Wall Street's financial modeling and forecasting. The concept is familiar to economics majors and business school students. among others. It's listed as one of the most important concepts learned by business school graduates, according to Business Insider.
The time value of money is also at the very heart of concepts like discounted cash flow analysis, a standard financial technique used to determine whether an investment -- including real estate, Mr. Trump's forte -- will pay off over time.
How did the New York Times use it?
Mr. Trump seems to be referring to The New York Times's use of inflation-adjusted figures. For instance, the Times alleges his father loaned him at least $60.7 million, which in today's dollars is the equivalent of $140 million after adjusting for inflation. That's a far cry from the $1 million loan that Mr. Trump has previously said he received from his father.
Because inflation changes the value of money over time, it's standard to adjust for its impact to ensure an apples-to-apples comparison across years. But it's not the same as the time value of money, which refers to the investment potential of money over time.
As a result, some experts were left scratching their heads about what exactly Mr. Trump was referring to.
"'Time value of money" doesn't refer to inflation," wrote Patrick Chovanec, managing director at Silvercrest Asset Management, on Twitter. "It refers to the return I would receive if I stuck my money in some ultra-safe interest-bearing asset (like US Treasuries) for a period of time. That's the opportunity cost I pay if I do something else with my money instead."
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