Time value of money says that money today is more valuable than the same amount of money in future. 100 Rs in your pocket today will buy more than it will next year.

Why does this happen? It happens for 2 reasons and they are both linked:

1. Inflation. When government expenditure is more than it’s income, they resort to printing money. More money in the economy chasing the same value is like dividing the pizza into many more slices. More the slices, less Pizza per slice. And therefore you will now need more slices to fill your stomach.
2. Opportunity Cost. Imagine you have an investment option that gives you 5% per annum. That means, 100 Rs invested today would become Rs 105 next year. Another way to say this is, 105 Rs next year will buy the same things as 100 Rs this year. Therefore 100 Rs next year is an inferior option as compared to 105 Rs next year (= 100 Rs this year).

So time value of money says that the value of money erodes with time.

Money value of time is less understood. Let’s say that I run a trucking company. 10 years ago, the roads were terrible. There were longer waiting times at the inter state borders. There were also longer waiting times at the toll booths. Now, thanks to GST there are no waiting times at the borders. Thanks to Fastag, there are no waiting times at toll booths. Thanks to better quality roads and highways, my trucks can travel faster.

As a result of the improvements in the infrastructure, the time per trip has reduced and therefore my trucks can make more trips in a year. More trips means more revenues with the same assets. Therefore, I can earn more profits out of the same assets as compared to before. These profits can be reinvested in purchasing more trucks or I can choose to take a vacation. But either way, I have more money now. So as time is saved, money in my pocket increases. That is money value of time for a business.

Even at an individual level, the same relationship exists but it’s hazy. But just because it is hazy does not mean it does not exist. For example, you may choose to watch less TV and save about 50 hours in a year. You could invest these 50 hours in reading, exercising or learning a new skill. This investment in yourself may take a few months or a few years to yield results in the form of a promotion, a better job, more income, better health or even a better state of mind. Some quantifiable as well as some unquantifiable. But, a better you nevertheless. That is the money value of time for you and me.

Let me leave you with an inspiring quote from The Almanack of Naval Ravikant:

Always factor your time into every decision. If it’s going to take you 1 hour to get across town and if you value yourself at $100 every hour, that is like throwing $100 out of your pocket. Set a very high hourly rate for yourself and stick to it. My hourly rate I used to say to myself is $5000. If you can outsource something for less than your hourly rate, then outsource it. Or not do it.

– From ‘The Almanack of Naval Ravikant’. I have edited the quote to make it more readable.

Cheers!