The Time Value of Money in Structured Settlement Factoring Transactions
Knowing something about at least the basic principles of investing is fundamentally important if you plan on getting into that game. Just as you wouldn't buy a house without getting all the information on the structure and costs, or a car without 'kicking the tires', anyone who wants to invest their money either in the stocks or annuities should get to know a few basic terms and what they mean, the Time Value of Money is one of these.
In a nutshell, the concept behind it goes like this: We all know that having an something right at the moment is better than getting the same thing down the road. It's better to have $50 dollars in your hand now than $50 dollars in your hand 3 years from now. Two things about this concept are important to understand. If you've got the money promised to you a 3 years from now, you've got to defer spending it for that time. Makes sense, right? It's not hard to understand that you can't spend what you don't have. But there's more.
You also miss the chance to make that money grow by investing it. This is a quick example of one of the big ideas behind investing-The Time Value of Money. The interest rates that we all hear so much about are the way that the macrocosm of a national or in some cases international economy determines the Time Value of Money. There are some other considerations that you'll need to have a look at as well to get a complete understanding of this idea. The next is what economists call the Present Value. This all may sound like a lot, but it's really just another simple concept.
Take that $50 dollar bill that we were using as an example. Simply put, the Present Value of that note is determined by the amount that you can earn today with it. If you've got that money in your hands, you can invest it or spend it, but right at the moment that it rests in you hands it's worth 50 bucks. That's easy. Now, we'll add a little something to the mix.
There's another idea that we should look at just so our whole treatment of the Time Value of Money is complete, and that's called, as you might have been able to guess, the Future Value. So let's have a look at what this means by taking our $50 dollar example again. The value we just discussed is of course the amount that you can earn in the future and one of the things that determines that is the interest rate. This is the lynch pin that determines the Time Value of Money. You might be asking yourself why this is important-there's a simple reason for that too.
If the interest rates are low you might get more for your money in terms of value by spending it now. This is just one of the decisions that you'll need to make when you're thinking about investments of various kinds, including the ones that you want to make over the long and short term.
How Does This Relate to Structured Settlement Factoring?
Structured settlement factoring is based upon principals of time value of money. Is it better to wait years for your money, or to get your money now? The simple answer to this question is that it is better to wait for your money due to the discount rates applied to a structured settlement factoring transaction. The more complex answer is "why" do people need cash now for their future payments. Structured settlement factoring is setup for individuals who are in desperate need for money, not for individuals who have other options besides factoring their settlement payments.
It is always best to consult with a financial professional before cashing out a structured settlement or annuity policy. A financial professional will be able to help you find other options, if available, and if not available will be able to help you complete the process of factoring a structured settlement.