Real Estate Appraisal Practice Exam

If you want to capitalize on the time value of money concept, you should ______.

1. Hold cash indefinitely

2. Invest money where it will earn interest

3. Minimize expenses

4. Pay down existing debts

The correct answer is: Invest money where it will earn interest

To take advantage of the time value of money concept, investing money where it will earn interest is the most effective approach. The time value of money asserts that a specific amount of money today is worth more than the same amount in the future due to its potential earning capacity. By investing, an individual can generate returns on their capital over time, thereby increasing its value. When money is invested in interest-earning accounts, stocks, bonds, or real estate, it not only has the opportunity to grow due to interest or appreciation but also offsets the effects of inflation, which diminishes the purchasing power of cash held indefinitely. This aligns directly with the principles of financial growth and wealth accumulation. Holding cash indefinitely fails to capitalize on this principle, as it does not generate any growth or return on investment. Minimizing expenses and paying down existing debts may have financial benefits but do not inherently leverage the potential growth of the initial capital through investment. Thus, the focus on earning interest is the cornerstone of applying the time value of money concept effectively.