The Time Value of Money- Structured Settlements no comments
If you have a structured settlement or an annuity, then you should be familiar with the time value of money. This is especially important to grasp if you are considering selling your payments to a company that buys them. They will value your payments now based in large part on this time value of money.
The basic idea behind the time value of money is really not that complicated to understand. You should already know that having money in your hand today proves to be more valuable than having money promised to you a few years from now. Everyone would prefer to have a hundred dollars in the hand today than three years from today. If you know that the money is coming but you do not have it today, then you can not spend it until that point in the future when you receive it. It is simple to grasp that you are not able to spend what you do not have now.
The other thing that you miss out on by not having the money is the capability of investing it now. This is where the actual Time Value of Money is determined, by the interest rates. The national interest rates literally determine how much time value your money has. Now, the present value of money is what your money will buy right now. It is also the amount of money that you can earn by investing it today.
The time value of money is also related to the concept of the future value of money. This is the value that the money will have in the future. It is also dependent on interest rates. The amount of money that you can earn with this money in the future is also part of the future value of money. So the time value of money is heavily dependent on the future value of money. When interest rates prove to be lower, then your money is more valuable to you today and you will likely chose to spend it. If the interest rates are higher, then the money will be more valuable to you in the future and you may decide to invest it.
Structured settlement valuing is based on the ideas of the time value of money. Ask yourself is it better to have your money now, or to have to wait years from now to get it? The quick answer is that you are better off waiting for your money because the structured settlement company will apply a discount rate to your transaction and reduce the amount of money that you receive by this factor. Naturally, this does not address the question of why you need money now instead of in the future payments that you are promised.
Structured settlement funding companies are in the business of helping people out who have urgent needs for their money now. Their services are less useful for people who have other choices available to them than taking advances on future payments. Before you sell your structured settlements to a funding company in this way, you should talk with a financial professional who can further explain to you the importance of the time value of money. They may also be able to assist you in coming up with other less expensive options than in selling your structured settlement at a discount for cash right now.