The concept of the time value of money defines the fact that money that is available at present is worth more in comparison to a similar amount of money in the future. The present value is more noting that in the present such cash has potential earning capacity. As such, the basic principle of the time value of money is that as long as money can gain interest, any sum of money is worth more the sooner it is received ( Carrada-Bravo, 2018) . Rational investors will, therefore, prefer to be given their money today instead of receiving a similar amount of money sometime in the future. Simple interest, on the other hand, is the reward that a principal amount of money earns in one period with the consequent interest in subsequent periods being calculated based on the principal amount.
The time value of money can be shown in the context of simple interest as a function of the present value of the principal amount multiplied by the interest rate and the number of periods the simple interest is accruing ( Carrada-Bravo, 2018) . Therefore: Future Value of Money= Present Value*[1+ (interest rate * time periods)]. Retirement planning assists in developing income goals as well as the decisions and actions necessary in achieving such goals. Time value of money and simple interest are significant factors critical in making a retirement plan. As noted earlier, a dollar today is worth more than a dollar tomorrow. Consequently, an individual needs to start saving at the earliest time during the working days since the money saved in the present will earn interest for every period based on the principal amount saved. Further, since there may not be much money that is free to invest, there is significant time to allow investments to mature.
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References
Carrada-Bravo, F. (2018). The fundamentals of the time value of money. Global Finance, Cases and Notes , 97-103. doi:10.4324/9780429456251-10
