What is future value (FV)?
Future value (FV) calculates how much an asset will be worth at a specific time in the future. Many investors and individuals use future value to determine if an asset or investment is worth their money. You can do the same.
If the future value doesn’t meet your needs, you can avoid making the investment altogether.
How do I use the future value calculator?
With the future value calculator above, calculating future value is as easy as can be. All you have to do are input the details of the investment. You’ll need its present value, the interest rate or yield rate, and the time period.
Keep in mind that the future value calculation assumes that your investment is a one-time investment that is left untouched for a specified period. The only variation in the formula would be if the asset uses simple interest or compounding interest.
With simple interest, the interest rate is only applied to the initial investment each year. Compound interest, on the other hand, applies the interest rate to each year’s starting balance. Investments with compounding interest usually grow faster than those with simple interest.
How is future value calculated?
If you’re looking to calculate future value by hand, the process is pretty simple. The equations for assets with compounding interest will look different than the equations for assets with simple interest. However, the components are the same. To calculate future value, you will need:
I = Investment amount (present value)
R = Interest rate or yield rate
T = Number of years
To calculate future value of an investment with simple interest, the equation is:
FV = I x ( 1 + ( R x T ) )
If the investment at hand uses compound interest, the calculation will look like this:
FV = I x ( 1 + R )T
The difference between the two calculations is very subtle. Be sure to pay close attention to the details of your investment before you calculate its future value.
What is the difference between future value and present value?
When you hear about future value, you might also notice a related concept called present value. To put it simply, the two calculations are the inverse of one another. Future value attempts to calculate what a current asset will be worth in the future. Present value calculates what something in the future is currently worth.
Future value calculations can help determine how much money you would need to invest in a particular asset to end up with “x” amount of money in the future. If you’re trying to save $100,000 within 20 years, you can figure out how much you’ll need to put aside now to achieve that goal.
How does time affect future value?
With most assets, the older they get, the higher their value grows. So, when calculating future value, the further away the target time period is, the higher the future value will be. Keep in mind that not all investments continue at the same growth rate over time. Stocks, for instance, can even lose value in the future, which can be difficult to consider when completing the calculation.
What are the advantages of using future value?
Basic future value calculations are incredibly easy to do, even without a future value calculator. The calculation is very wide-reaching and can be applied in many situations. Its versatility makes it a great tool for investors of all types.
Although it is not an accurate calculation in every situation, it does allow companies and individuals to plan for the future. Being able to compare two investment types is important throughout many aspects of life, and future value does the job.
What are the disadvantages of using future value?
The future value calculator is dependent on the estimates that are input, which are always subject to change. You could find yourself in a situation where the calculation is very far from what actually ends up happening with your investment.
Intricate details of an investment can be difficult to consider when calculating future value. The calculation assumes that the asset’s growth rate is constant, which is rarely the case in reality. It can also be difficult to use this calculation with complex investments such as annuities or assets with irregular returns.