Present Value vs Future Value - How to Tell the Difference

Summary

In this informative video, Bond Crowder explains the key differences between present value and future value in finance. Present value refers to the current worth of money, illustrated by borrowing to buy a car today. In contrast, future value focuses on saving over time to purchase a car in the future. Through relatable examples, Crowder emphasizes the importance of understanding these concepts for effective financial decision-making. The video aims to demystify math, encouraging viewers to see it as a valuable tool rather than a daunting subject.

Takeaways

• 😀 Present Value (PV) involves borrowing money to make a purchase now.
• 😀 Future Value (FV) focuses on saving money to make a purchase in the future.
• 😀 Both PV and FV concepts use a timeline to differentiate between immediate and future amounts.
• 😀 In a Present Value scenario, you receive a large amount of money upfront to buy something (e.g., a car).
• 😀 After borrowing in a Present Value situation, you make payments over time until the debt is cleared.
• 😀 Future Value requires a gradual savings approach, where you save money over time to reach a target amount.
• 😀 The future purchase might allow you to afford a nicer item due to saving over time.
• 😀 Understanding whether to use Present Value or Future Value is crucial for finance students.
• 😀 Formulas for PV and FV are available in textbooks and from instructors but are not the focus here.
• 😀 The speaker emphasizes that math can be enjoyable and accessible, not daunting.

Q & A

What is the main topic discussed in the video?

The video discusses the difference between present value and future value in finance.

What is present value in the context of borrowing money?

Present value refers to the current amount of money you need to borrow to make a purchase, like a car, which you pay back over time.

How does future value relate to saving money?

Future value refers to the amount of money you will accumulate over time by saving and investing, enabling you to make a purchase in the future.

What example does the speaker use to illustrate present value?

The speaker uses the example of borrowing $25,000 from a bank to buy a car, emphasizing that you receive this amount immediately.

What process is described for achieving future value?

To achieve future value, you save money over time, making regular contributions until you have enough to buy something like a car.

What does the speaker mean by 'the dealership wants their money right now'?

This means that when you borrow money to buy a car, the dealership expects immediate payment, necessitating a loan.

How does the time aspect differentiate present value and future value?

Present value deals with immediate financial needs, while future value involves planning and saving for expenses that will occur later.

Why might someone prefer to save for a car rather than borrow money?

Saving for a car can lead to purchasing a nicer vehicle without debt, as opposed to borrowing, which involves paying interest and eventually owing money.

What are the implications of making payments on a loan for a car?

Making payments on a car loan means you will have paid more than the initial price of the car over time due to interest.

What reminder does the speaker give about math?

The speaker reminds viewers that 'math is not a four-letter word,' suggesting that understanding math concepts like present and future value is important and approachable.