Time Value Of Money: Determining Your Future Worth

If you were offered $100 today or $100 a year from now, which would you choose? Would you rather have $100,000 today or $1,000 a month for the rest of your life?

Net present value (NPV) provides a simple way to answer these types of financial questions. This calculation compares the money received in the future to an amount of money received today, while accounting for time and interest. It's based on the principle of time value of money (TVM), which explains how time affects monetary value. (For background reading, see Understanding The Time Value Of Money.) The TVM calculation may look complicated, but with some understanding of NPV and how the calculation works, along with its basic variations: present value and future value, we can start putting this formula to use in common application.

Time Value of Money
If you were offered $100 today or $100 a year from now, which would be the better option and why?

This question is the classic method in which the TVM concept is taught in virtually every business school in America. The majority of people asked this question choose to take the money today. But why? What are the advantages and, more importantly, disadvantages of this decision?

There are three basic reasons to support the TVM theory. First, a dollar can be invested and earn interest over time, giving it potential earning power. Also, money is subject to inflation, eating away at the spending power of the currency over time, making it worth less in the future. Finally, there is always the risk of not actually receiving the dollar in the future - if you hold the dollar now, there is no risk of this happening. Getting an accurate estimate of this last risk isn't easy and, therefore, it's harder to use in a precise manner.

Illustrating the Net Present Value
Would you rather have $100,000 today or $1,000 a month for the rest of your life?

Most people have some vague idea of which they'd take, but a net present value calculation can tell you precisely which is better, from a financial standpoint, assuming you know how long you will live and what rate of interest you'd earn if you took the $100,000.

Specific variations of time value of money calculations are:

• Net Present Value (lets you value a stream of future payments into one lump sum today, as you see in many lottery payouts)
• Present Value (tells you the current worth of a future sum of money)
• Future Value (gives you the future value of cash that you have now)

Determining the Time Value of Your Money
Which would you prefer: $100,000 today or $120,000 a year from now?

The $100,000 is the "present value" and the $120,000 is the "future value" of your money. In this case, if the interest rate used in the calculation is 20%, there is no difference between the two.

Five Factors to a TVM Calculation.
1. Number of time periods involved (months, years)
2. Annual interest rate (or discount rate, depending on the calculation)
3. Present value (what do you have right now in your pocket)
4. Payments (if any exist. If not, payments equal zero)
5. Future value (the dollar amount you will receive in the future. A standard mortgage will have a zero future value, because it is paid off at the end of the term)

Many people use financial calculators to quickly solve these TVM questions. By knowing how to use one, you could easily calculate a present sum of money into a future one, or vice versa. The same goes for determining the payment on a mortgage, or how much interest is being charged on that short-term Christmas expenses loan. With four of the five components in-hand, the financial calculator can easily determine the missing factor. To calculate this by hand, the formula would look like this:

FV = PV (1+i)^N

Or conversely

PV = FV
(1+i)^N

Net present value calculations can also help you discover answers to other questions. Retirement planning needs can be determined on an overall, monthly or annual basis, as can the amount to contribute for college funds. By using a net present value calculation, you can find out how much you need to invest each month to achieve your goal. For example, in order to save $1 million dollars to retire in 20 years, assuming an annual return of 12.2%, you must save $984 per month. Try the calculation and test it for yourself. (To learn more about how compounding contributes to retirement savings, see Young Investors: What Are You Waiting For? and Why is retirement easier to afford if you start early?)

Below is a list of the most common areas in which people use net present value calculations to help them make decisions and solve their financial problems.

• Mortgage payments
• Student loans
• Savings
• Home, auto or other major purchases
• Credit cards
• Money management
• Retirement planning
• Investments
• Financial planning (both business and personal)

Conclusion
The net present value calculation and its variations are quick and easy ways to measure the effects of time and interest on a given sum of money, whether it is received now or in the future. The calculation is perfect for short- and- long-term planning, budgeting or reference. When plotting out your financial future, keep this formula in mind.

Source: http://www.investopedia.com/

By: Daniel Myers,CFA

How to Get a Job When No One's Hiring

David Perry, a longtime headhunter, says you're wasting your time if you're looking for job postings online. And he should know: he's often the guy on the other side helping companies lure new talent. Perry, who's based in Ottawa, says that in the last 22 years he has accomplished 996 searches totaling $172 million in salary. And the bottom line in today's economy, he says, is you have to tap the "hidden job market."

Perry's also the co-author of "Guerrilla Marketing for Job Hunters" and he recently spoke with Fortune.

Just last month, Bank of America CEO Ken Lewis warned lawmakers at a high-profile Congressional hearing on the government's $700 billion rescue plan that he had no doubts 2009 would be an "awful year" for the credit card industry.

What's the "hidden job market"?

When companies say, 'We have a hiring freeze,' that doesn't mean they're not hiring. It just means they're not adding headcount. Every year there's 20-25% turn over. So in a 1,000-person company, 200 or 250 people are going to turn over, either through attrition, or someone moves. Those companies are still hiring but they don't want to tell you.

So how do you find these jobs?

What you have to do in a recession is map your skills to employers to where you know they have a problem you can solve. My advice to job hunters is pick 10 to 20 companies, no more, and pick companies you're interested in, and that you think you can add value to. That requires researching companies, and so that list may take you two weeks. If you're trying to crack the hidden job market and you know the job position you want reports to vice president, find that vice president on LinkedIn and look at his profile to see who else he's connected to and go ask them, 'What's this guy like to work for?' Do the research before you even pick up the phone.

How can you get someone's attention?

We can go into billboards, sandwiches - that stuff only works once. It's only for one person who figures it out once, once in a city. If you're looking for fun stuff, we have this thing called the coffee cup caper, 30% of the time it will result in an interview. You send an employer a coffee cup with a little $5 swipe card with a little note that says, I'd like to get together and talk with you over coffee. I'll be calling soon. And you send it by U.S. post two day delivery, and that gets registered. So when they've signed for it, you wait about 20 minutes and then you call them. And then you go, Hi, I know you just got my package.' You're proving you're imaginative and creative.

What something people should avoid during a job interview?

This drives me insane: I've seen people mentally deciding in the interview whether they want the job. That's the last place to decide. You go into an interview, and you sell like your life depends on it. You've got to get the job first. I've seen it thousands of times. There's this point in the interview, where people go 'Hmm, do I really want this? You can see their body change. The employer picks it up and it's gone. If the employer is telling you, 'I love you,' and you're not saying 'I love you too,' it's over with.

How about following up afterwards?

If you really like the opportunity, don't go home and write thank you very much. Go back and write a letter that says, upon further reflection of what we were talking about, here's what I bring to the table, here's how I see myself fitting into the organization, including a 30-60-90 day plan.

How can someone attract a recruiter's attention?

You have to go to ZoomInfo and LinkedIn and create a profile. All corporate recruiters and probably 20% of the headhunters in America have ZoomInfo accounts. When we start a search, companies aren't going to advertise. The headhunter goes to ZoomInfo, types in requirements that we need, like skillset, degree, city, functional title, and up will come anywhere from a hundred to several thousand people who fit that criteria. Then we go to LinkedIn and run the same search. If you're in ZoomInfo with a picture, we're going to call you first. Just reverse engineer what recruiters are doing so you get found.

How can you really impress a potential employer?

It hasn't worked in years just to bring in your resume, except only in the most junior positions. I concentrate on directors to CEOs, and the last interview for us regardless is always a Power Point presentation of what you've learned, pain points, and how you intend to fix that. Everyone talks about being a great leader and great communicator, so prove it. Don't go into an interview and treat it like it's just another business meeting. Your career is your biggest asset now - because it's certainly not your house.

Source: (by Jia Lynn Yang Fortune)