Lesson 1 of 3 · 7 min
A rupee today, a rupee next year
Why the same number is worth two different amounts depending on when it lands, and how one turns into the other with a single division done on paper.
Offered ₹10,000 today or ₹10,000 in a year, almost everybody takes today, and almost nobody can say exactly why. The reason is not impatience.
The rupee in your hand today can be put somewhere and be more than a rupee by next year. The rupee promised for next year can do nothing until it turns up. That gap sits underneath compounding, borrowing, deposits and every calculator on this site. Its name is the time value of money.
Your turn
The National Savings Certificate rate notified for the current quarter is 7.7% a year. Put ₹10,000 in today. What is it worth after one year, in rupees?
Your turn
Now run it backwards. Somebody offers you ₹10,770 in a year's time. At the same 7.7%, how much would you need to put in today to end up with exactly that?
Two forces make the gap, and they pull the same way. The first is that money left somewhere sensible earns something, so waiting has a price you can name and calculate. The second is that prices generally drift upward, so the same rupee buys a little less each year.
The inflation course takes that second force apart on its own. Together they mean any promise of money later has to be discounted before you can fairly compare it with money now. "I return it next month" is worth less than "here it is today", even when the person is entirely good for it.
Work it out yourself
The second force, on its own. Put in a cost you actually face — a year of college, a phone, a month's rent — and whatever inflation rate you think is realistic, and see what the identical thing costs later.
Inflation CalculatorCheck yourself
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Kabir asks
Why is ₹10,000 today worth more than ₹10,000 in a year?
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