Question

Why is it important to prepare a financial budget?

Explain what is meant by the term "time value of money". For example, why might it be better to receive $8 today, over receiving a promise of $9 seven years from now?

How should one consider the time value of money when planning for retirement? Please share examples within your response.

Answer 1

A. Financial budget is important in order to achieve our financial goals and objective and get financially independent by lowering our debt and never missing out on debt payments

financial budget also helps us to keep a check on our income and allocate it efficiently and effectively on various expenses so that we are left with allocable surplus at the end of month or end of year.It helps in achieving a financial edge and it also helps in understanding the financial independence in the future.

B. Time value of money means the value of money today is greater than the value of same money tomorrow, this is because there is a time value of money factor associated with it which reflects that the purchasing power of money decreases day by day when there are various factors in an economy like inflation and interest rate which will decrease the overall value of the money over a period of time.

It has implications in retirement when one should start to invest early for his retirement goals he would be getting more of accumulated money at the end because that would lead to compounding due to time value of money concept as there would be more time there would be more chances of compounding