What is future value

Next, we simply plug the numbers into. That means we use the formula in. Privacy Policy. Skip to main content. The Time Value of Money. Search for:. Future Value, Single Amount. Learning Objectives Calculate the future value of a single-period investment.

Key Takeaways Key Points Single- period investments use a specified way of calculating future and present value. Single-period investments take place over one period usually one year. In a single-period investment, you only need to know two of the three variables PV, FV, and i.

The number of periods is implied as one since it is a single-period. Key Terms Multi-period investment : An investment that takes place over more than one periods. Periods t or n : Units of time. Usually one year. Single-period investment : An investment that takes place over one period, usually one year. Multi-Period Investment Multi-period investments take place over more than one period usually multiple years. Learning Objectives Calculate the future value of a multi-period investment with simple and complex interest rates.

Key Takeaways Key Points Investments that accrue simple interest have interest paid based on the amount of the principal, not the balance in the account. Investments that accrue compound interest have interest paid on the balance of the account. Future value is a sum used to predict the future return on an investment, taking interest rates into account.

You can use it to evaluate the viability of different investment opportunities and see which offers the most enticing level of growth. The future value equation works on the assumption that the amount you invest will go untouched on your end, but will grow through interest.

You can also use future value to predict the cost of an asset or product at a future date, if the cost increases at a constant rate. Additionally, you can use the future rate formula in reverse, to deduce what interest rate you should strive for to reach your desired growth. You might be contemplating various savings accounts to invest in, and you can use future value of money to weigh up your options and determine which account will offer the most growth.

The calculation used to determine future value will vary depending on whether your investment offers simple annual interest or compounded annual interest. The general future value formula assumes that the investment will grow at a constant rate through simple annual interest.

To work it out, use the following calculation:. In this formula, I refers to investment amount, R refers to interest rate, and T refers to number of years. While simple interest always applies the interest rate to the amount of the initial investment, with compound interest, the interest rate applies to the cumulative account balance for each period.

Practically speaking, it is more useful to calculate future value using compound interest. Simple interest accounts for interest accumulation over time without compounding.

It is simply the principal amount adjusted for the annual interest rate. Compound interest accounts for the interest earned on the value of previous interest earned. Future value determines the effect of time on money.

Using future value and other measures can help you make sound financial decisions. The basic principle behind the time value of money is simple: One dollar today is worth more than one dollar you will receive in the future. This is because you can invest the dollar you have today, and it can grow over time at a rate of return, or interest.

The process of earning interest on interest is called compounding , and it has a powerful effect on the future value of an investment. One way to apply future value to financial decision making is to consider your tax refund. If you will receive a refund, it means you had more tax withheld from your paycheck than what you owed.

If you change your withholding, you could invest those overpayments throughout the year and earn interest. Of course, you need to be disciplined enough to invest the extra amount in your paycheck and not spend it. There are two types of future value calculations:.

The easiest way to calculate future value is to use one of the many free calculators on the internet, or a financial calculator app such as the HP 12C Financial Calculator available on Google Play and in the Apple App Store. Most spreadsheet programs have future value functions as well.

If, however, you like math problems, here's how to manually calculate future value:. A common use of future value is planning for a financial goal , such as funding a retirement savings plan. Future value is used to calculate what you need to save and invest each year at a given rate of interest to achieve that goal.

Future value is also useful to decide the mix of stocks, bonds , and other investments in your portfolio. The higher the rate of interest, or return, the less money you need to invest to reach a financial goal.