When it comes to your financial future, this Time Value Money Calculator is probably the most important online calculator you will ever run across. In fact, ignoring the concepts brought to light in this calculator could end up costing you a vast fortune in potential future wealth!
Specifically, this free online Time Value Money Calculator will calculate the time and financial opportunity costs of buying and owning goods for which the value declines with time and use, and which often come with one or many ongoing costs of ownership. These goods are often referred to as depreciable or depreciating assets.
The time value money calculator will also translate the monetary opportunity costs into the opportunity cost of time, as in, how many hours could you take take off from work at some point in future if you invested the cost of buying and owning instead of repeatedly buying and owning new versions of the same asset.
If you are interested in calculating opportunity costs for purchases for which the value lasts less than one year, and that do not come with ongoing ownership costs, please visit the TVM for Consumables Calculator -- which also includes the answer to "What is Time Value of Money?" as well as an eye-opening explanation of the little-thought-of concept I refer to as, The Money Value of Your Time.
Or, if you are interested in using a calculator specific to one of the 4 primary time value of money concepts, please choose from the following calculating options:
As they relate to personal finance, depreciable assets are physical goods that maintain at least a portion of their value for longer than one year, but for which the value declines with use and/or the passage of time. For our purposes, the term value refers to resale value, as in, how much money will a buyer be willing to pay for the asset at a given point in time.
Specifically, depreciable assets include things like buildings, motorized vehicles and tools, electronics, appliances, furniture, fixtures, and equipment (heater, air conditioner, bicycle, etc.).
In my experience the typical consumer only uses two factors when deciding whether or not to purchase a depreciable asset. First, how much does it cost? And second, can I afford the monthly payment? In fact I would venture to guess that many consumers only consider the latter of the two.
In either case, using only these one or two factors to decide on whether or not to buy a depreciable asset is comparable to a shift taking place between two plates on the ocean floor of your financial future. The wave the poor decision creates may appear small while it's still far from your future, but when the tsunami arrives on the shore of your financial future it may arrive with such destructive force that no amount of your potential wealth will be left standing.
What most people fail to realize when considering the purchase of a depreciable asset, is that the amount printed on the asset's price tag often represents only a small fraction of eventual cost to their potential future wealth.
First, in addition to the amount printed on price tag, the mere act of buying a depreciable asset often inflates the cost. I call these point-of-sale increases, "Purchase Costs." These purchase costs include costs such as sales tax, extended warranties, shipping and handling fees, loan costs, finance charges, and so on. And speaking of purchase costs, here's something to gnaw on. What use would these purchase costs serve if purchased without the asset?
Second, in addition to the base price and purchase costs, many depreciable assets come with one or more ongoing ownership costs. These ongoing ownership costs include expenses such as energy (gas, fuel oil, electricity, propane, etc.), insurance, storage, maintenance, repairs, depreciation (loss of value due to time and/ or use), and so on.
But wait, even if you were to take the time to calculate the total cost of buying and owning a depreciable asset (such as an automobile), for as much as the total cost might shock you, it's still just a small wave in the ocean of your financial future.
Throughout this website I've been like Paul Revere riding my web-horse through the streets while screaming, "The opportunity costs are coming! The opportunity costs are coming!" Well, if you've ignored my warnings in the past, I hope for the sake of the survival of your potential future wealth that you will pay very close attention here.
To illustrate the tsunami effect of the cost of buying and owning a major depreciable asset, let's suppose you just purchased a new automobile with a price tag of $25,000 and you plan to keep it for 5-years -- at which point you figure you could sell it for $10,000. Further suppose that you paid a 7% sales tax, purchased a $700 extended warranty, and you paid $5,000 down on the vehicle -- financing the rest at 8% for 60 months. Finally, you estimate that your annual ownership costs will include $2,400 for gas, $700 for insurance, $360 for maintenance and repairs, and $130 for licensing.
If you plug the above variables into the time value money calculator, you will see that the average annual cost of buying and owning the car for 5-years would amount to $8,052.46 -- for a total 5-year cost of $40,262.30. But that only covers 5-years of your need for an automobile. What about the rest of the time you will need a vehicle?
If you expect to repeat this car buying scenario every five years for the next thirty years, the time value money calculator reports a total 30-year cost of $241,573.80. In other words, the cost to buy and own a $25,000 car for 30-years will add up to nearly a quarter of a million dollars. Actually ... it will cost you a lot more than that!
If you found a way to go without buying and owning this vehicle, and instead invested the $8,052.46 annual ownership costs into an investment earning 6% per year, the time value money calculator calculates that at the end of 30-year period your investment would have grown to ... wait for it ... $636,612.88 ($241,573.80 spent, plus $395,039.08 in lost interest earnings). That, my friend, is the true cost of buying and owning a $25,000 car for 30-years.
But wait! Do you know what the actual difference is between having spent $241,573.80 and having $636,612.88 in your possession? It's a difference of $878,186.68 ($636,612.88 - -$241,573.80 = $878,186.68). Shut the door!
And remember, that's only one example of one depreciable asset! Imagine what the opportunity costs will add up to for all of the depreciable assets you will buy and own during the course of your lifetime. Can you now see the ever-growing size of the wave that's bearing down on your financial future?
Sure, you may not be able to get by without owning a car, but if you play around with the time value money calculator you will see that even small reductions in price, purchase and ownerships costs for large-ticket assets can add up to tens of thousands of dollars in reduced opportunity costs over the long term.
In effect, this means that the time you spend researching the best deal for an essential, large-ticket depreciable asset can translate into an hourly wage equaling hundreds of dollars (a penny saved is a penny earned).
Referring back to the car buying example, I can virtually guarantee you that your friendly neighborhood car salesman -- you know, the one that claims to care about you so much -- will never point out the true cost of buying and owning what he is selling you. But not because he is intentionally withholding this sales-killing information just to make the sale, but because he's likely not aware of these costs himself.
You see, what's even more shocking than the size of the powerful opportunity cost tsunami that's bearing down on the financial futures of the majority of consumers is the fact that most of us managed to go through 13-years of public education without ever hearing the term "opportunity cost." We were shown how to dissect a frog, yet told nothing of the dangers (opportunity costs) that might keep us from building our financial futures on the shores of a major fault line.
I guess you could say that the failure of our k-12 educational system to teach us the concept of "opportunity cost" left most of us to go through life walking around with our heads up our assets.
With that, let's use the Time Value Money Calculator to calculate the time and financial opportunity costs of buying and owning a specific depreciable asset.
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Expected annual return on investments: Enter the annual interest rate you expect to earn on your investments. Please enter as a percentage (for .06, enter 6%). The time value money calculator will use this rate to calculate the lost interest earnings.
Hourly wage: Enter your current hourly wage (the money value of your time). If you earn a salary and would like to know what you hourly rate of pay is, please visit the Annual Salary to Hourly Pay calculator. The time value money calculator will use this figure to calculate the opportunity cost of time.
Number of years to calculate opportunity costs: Enter the number of years to calculate time value of money for. This could either be an arbitrary number of years or it could be the number of years till a significant date is reached (child reaches college age, your retirement age, etc.) -- although it should be at least the number of years you plan to own the depreciable asset you are calculating opportunity costs for.
Name of depreciable asset: Enter the name of the depreciable asset you are calculating opportunity costs for. For our purposes, a depreciable asset is considered to be an asset that maintains a portion of its value for more than 1 year, and may include ongoing costs of ownership (energy, insurance, storage, maintenance, repairs, depreciation, etc.).
Number of years you plan to own asset: Enter the number of years you plan to own the asset. This could also be the number of years you expect the asset to last (useful life). Note that even though a depreciable asset may have a long life span, the technology it is based on may become obsolete much sooner than you expect. The time value money calculator will repeat the purchase for the number of opportunity cost years.
Base price: Enter the base price of the depreciable asset. This should include the cost of all added options and features, but not the cost of financing -- which will be addressed in the Finance Variables section. This is the amount the time value money calculator will calculate sales tax on.
Salvage value at end of ownership term: Enter the amount, if any, you expect to be able to sell the asset for after owning it for the number of years you entered. This reduction in value during the ownership period is referred to as depreciation. The time value money calculator will divide the total depreciation by the years of ownership in order to arrive at the annual cost of depreciation. In reality, most assets depreciate at a much faster rate in the early years of ownership as compared to the later years of ownership. This is why buying a new version of depreciable asset every one or two years will cost you a fortune in depreciation costs when compared to buying a new version every 10 years.
Sales tax percentage, if applicable: If sales tax will be charged on the base price of the asset, enter the percentage here (for .07, enter 7%). The time value money calculator will calculate the sales tax dollar amount by multiplying the sales tax percentage by the base price entered earlier.
Extended warranty, shipping, appraisal, title fees: Enter the total of any miscellaneous fees and charges that would be considered useless if purchased without the asset. Note that this total will not be included in the time value money calculator sales tax calculation.
Total purchase costs: This is the calculated total of the base price, the sales tax, and the miscellaneous purchase costs.
Cash payment: If you are paying cash for this asset, enter the same amount as is calculated in the Total purchase costs field. Entering an amount less than that will tell the time value money calculator to finance the difference.
Amount to finance: This the calculated difference between the total purchase costs and the cash payment amount. If the two are equal (you are paying cash for the asset), you can skip this section and move on to the next.
Financing rate: Enter the annual percentage interest rate you will be paying on the financed portion of the purchase. The time value money calculator will require an entry in this field before it will calculate the monthly payment.
Repayment term in number of months: Enter the number monthly payments you will make before the financed portion of the purchase is paid off. The time value money calculator will require an entry in this field before it will calculate the monthly payment.
Loan costs: Enter the total of any loan costs that serve to increase the amount to finance, but that would be worthless without the asset (origination fees, etc.). Note that the time value money calculator will not be roll these costs into the loan amount for calculating payments, but will include them in the average annual loan costs.
Monthly payment: This is the calculated monthly payment derived from the amount to finance, the finance rate, and the number of monthly payments. The time value money calculator will use this result to calculate the interest cost for the ownership period, and to determine if you will have the balance paid off by the time you are ready to sell or discard the asset.
Balance owed at end of ownership period: This is the calculated balance owed as of the end of ownership period, if any portion of the purchase was financed. The time value money calculator will calculate payments made until the loan is paid off or until the ownership term is ended, whichever occurs first.
Net proceeds from sale at end of ownership period: This is the difference between the entered salvage value and the calculated remaining balance of the loan at the end of the ownership term. If the time value money calculator generages a negative result it means you will owe that much more than the asset is worth at the time you are ready to sell. This is otherwise known as being upside down in the loan. If the number is positive it means that this is how much will be left after paying off the balance owed from the proceeds of selling the asset.
Interest cost during ownership period: This is the calculated total of the interest paid during the number of years you plan to own the asset.
Energy: If this asset will require energy to operate (gasoline, fuel oil, electricity, propane, etc), enter your best estimate of the cost of the required energy and select the corresponding expense period. The time value money calculator will translate the amount and expense period into the annual amount.
Insurance: If you expect to insure the asset against loss or being sued, enter the premium amount and select the premium frequency. Or, if the asset will be included in an existing umbrella-type policy, enter the amount of the premium you believe represents the portion attributable to the asset. The time value money calculator will translate the amount and expense period into the annual amount.
Storage: If you are or will be renting a storage facility to house this asset, enter the portion of the rental fee that is attributable to the asset and select the corresponding expense period. Technically, all physical assets have a storage expense. After all, the more stuff you buy, the bigger the residence, garage, or storage shed you will need, some of which also will need to be heated, cooled, and/or maintained. Therefore, if this asset will take up space, I encourage you to enter an estimate, no matter how small. The time value money calculator will translate the amount and expense period into the annual amount.
Maintenance & repairs: Enter the amount you expect to spend on maintaining and/or repairing the asset and then select the corresponding expense period. This is the periodic amount you should be setting aside in an asset repair and maintenance account -- along with all of the periodic amounts to cover all of your existing depreciable assets. Everything that can break most likely will, but as long as you prepare for these expected events, the thing that breaks will not be your budget. The time value money calculator will translate the amount and expense period into the annual amount.
License and permits: If this asset requires a periodic purchase of a license or permit, enter the amount here and then selected the corresponding expense period. The time value money calculator will translate the amount and expense period into the annual amount.
Property tax: If this depreciable asset is building, enter the property tax amount attributable to the asset and then select the corresponding property tax payment interval. While most people do not consider buildings to be depreciable assets, unless they are made of an indestructible alloy, father time will see to it that they will eventually need to be replaced. Sure, your property as a whole may increase in value (or may drop in value), but all buildings come with ongoing costs of ownership which serve to nullify any appreciation in property values that may occur (plus, property value increases also result in higher taxes). The time value money calculator will translate the amount and expense period into the annual amount.
Sales tax and miscellaneous purchase costs: This is the average annual cost of sales tax and miscellaneous purchase costs over the course of the ownership period.
Interest charges and loan costs: This is the average annual cost of interest charges and loan costs over the course of the ownership period.
Depreciation: This is the average annual cost of depreciation over the course of the ownership period.
Total average annual ownership costs: This is the total average annual cost of all costs associated to owning the asset.
Total ownership costs for single ownership term: Based on your entries, this is how much you will spend to own this depreciable asset for the number of years you plan to own it.
Total ownership costs for opportunity cost years: Based on your entries, this is how much you will spend to own this depreciable asset for the number of years you plan to repeat the buying and selling of this type of asset.
Lost interest: If you spend the annual average cost to own the asset instead of investing that amount, this is how much interest earnings you will lose over the course of the number of years you expect to repeat this buying scenario.
Financial opportunity costs: Based on your entries, this is the minimum financial opportunity cost of choosing to spend money to own this depreciable asset instead of choosing to invest the money. Please note that if you have high interest debt that could be reduced or paid off with money saved by eliminating this depreciable asset from your buying habits, then the financial opportunity cost of repeating this buying scenario is actually much greater than the time value money calculator is reporting.
Time opportunity cost: Based on your entries, this is the total number of hours you could take off from work if you invested the cost of buying and owning the depreciable -- after the entered number of opportunity cost years have passed. So if there is something you would rather do with the time you spend at work, then the financial opportunity costs would further lead to personal opportunity costs (good times lost).