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Course Summary

You've now completed the This Is Your (Financial!) Life: The Time Value of Money course. You've explored the concept of opportunity cost, learned how inflation has changed the value of the dollar over the years, experimented with interest rates and practiced planning for the future with the present value and future value formulas.

It is useful to understand present value if you have a specific savings goal in mind because it allows you to determine what you need to save now to reach your goal. Likewise, understanding future value helps you see that a certain sum of money in the future, say $1,000, is not as valuable as the same amount of money today because it won't buy as many goods and services then as it will buy now. Inflation is the reason for this loss in value. Therefore, to keep up with inflation, money must earn interest equal to the rate of inflation. The interest payment is compensation for the opportunity cost of saving. In other words, saving your money under your mattress will not earn interest, and the amount you saved would not buy as many goods and services in the future, when you got around to spending it. Interest payments help you keep up with the inflation so that when you want to spend your savings in the future, it will buy the same amount of goods and services you gave up during all those years of saving.

When you fail to plan, you plan to fail. Okay—it's a clichè. But, clichès express long-held views that have a basis in truth. If you fail to plan for a millionaire's retirement, you won't have a millionaire's retirement. Actually, if you fail to plan for a car in five years, you probably won't have that either. Having what you want in the future takes discipline, but it also takes know-how. Understanding present value and future value will provide you with your first steps toward gaining know-how. The discipline is up to you.