Finance - Value of Money

Finance is basically study about value of money in different time interval and how to determine it. Just look at a simple example: For a RM1 in your hand now, is it still worth the RM1 value as same as today in 10 years later? Today you can buy a product X with RM1, but 10 years later, you may need to spend RM5 or more on the same product X, due to inflation effect.

In economic, we call the above money value measurement as “buying power”. So, let’s have a look at Malaysia inflation rate, it is about 5% - 6% in average annually, if you are going to save your money in a commercial bank fixed deposit, with deposit rate of 2% - 3% annually, it is definitely unable to cover the gap left behind inflation rate, in simple words, it means that your money “buying power” value will gradually reduced in future no matter how much your saving is. Well, how to avoid this?

Set aside on personal view on money; now let’s change your sight to a company view. When a company considering investing in a project, launch new product, buying new asset or else, they will firstly think about the return on the investment, as company is profit-oriented. Well, how do they decide whether to make an investment? If there are more than one investment alternative, which should they go in? How do they determine the minimum required rate of return?

Look, the answers to the above questions were what we study in finance. Even things are quite complicated in this field, but, in a big picture; the main point in finance is just about “value of money”.

Next post will be touch on various rates (return rate, discount rate, interest rate and else) and their what-and-how effect on money value. Thanks for reading my post~! :)