Money Rules to Live By VIII

The time value of money
This is one of my favourite. It boils down to a relatively simple proposition: that the dollar I get today is worth more than a dollar I'm promised sometime in the future. If money has a way of shrinking, this is it. I remember I use to pay 35 cents for a cup of coffee in coffee shops. Now, the same 35 cents gets me only one-third of that cup. Put it simply, that same cup of coffee is now going at 90 cents. That's about 257% over a period of 28 years! Inflation, they call this phenomenon.
There are several reasons for this. One is the "bird in the hand" reality: the dollar I get today is real, but the dollar I'm promised in the future likely will be worth less (because of inflation), or I might not get it at all (you might renege on your promise to give it to me, or die, or cease operations if you're an employer or business). Also, the dollar I get today can be invested to create more dollars in the future.
Turn this around, and you'll see why lenders charge interest for loaning money, and why the interest rate depends on your creditworthiness. Lenders want to be compensated for the erosion in their dollars due to inflation, and for the risk of lending money to you.
The higher the perceived rate of future inflation and the more lenders doubt your promise to pay the money back, the more interest they'll charge to compensate for the risk.