Future Value of Money

Understanding Future Value

Think of Future Value (FV) as money’s time‑travel trick. It tells you how today’s savings or investments can grow into a bigger pot tomorrow, thanks to compounding interest over time. 

This concept helps you picture what your nest egg could look like years down the road, so you can plan for retirement, holidays, or buying a car or your dream home.

Understanding FV helps you decide how much to set aside to reach the financial outcomes you’re aiming for.

Calculating Future Value 

To calculate Future Value, use the formula: 

PV is the present value, i is the interest rate, and n is the number of periods. 

For example, if you invest $2,000 today at an annual interest rate of 4% for 5 years, the future value of your investment would be $2,432.32. 

This formula helps you plan for future financial goals by understanding how investments grow over time.

Noe’s Future Apartment 

After receiving a $10,000 year-end bonus, Noe decides to set it aside for a more responsible life goal than a motorcycle: saving for a down payment on an apartment in his city. 

Using the Future Value formula, Noe calculates how much this bonus will grow over 10 years at a 7% interest rate. 

The calculation is: 

FV = $10,000 * (1 + 0.07)^10

This equals approximately $19,671.51. 

This shows how investing today can nearly double Noe's savings over a decade, bringing him closer to owning his first home.

Understanding Annuities 

An annuity is a series of equal payments made at regular intervals over time, commonly used in retirement planning or structured settlements. 

There are two types of annuities: 

• Ordinary annuities, where payments are made at the end of each period.
• Annuities due, where payments are made at the beginning.

Understanding annuities is crucial for calculating the present and future value of these payments, helping you plan for consistent income over time.