You must consider the present and future values of your investment. For instance, if $500 is invested in stocks you should also take into consideration its potential value. By understanding the rate of return on your investment, such as 10 percent annually over five years, you can then calculate that after five years your initial $500 would have grown to a total of approximately $806.50 (the “future value”). Alternatively, by using this same information one could also calculate how much they would need today (the “present value”) so that their investment grew to exactly $806.50 after five years – allowing them to decide whether waiting for their investments’ growth is more valuable than spending the cash on hand right away.
It helps them understand the best time to purchase an asset, as they know its estimated value in X amount of years. It also assists investors in determining whether waiting for returns from their current investments will provide better results than reinvesting those funds elsewhere immediately – helping people plan for long-term financial success.