Every time you spend money you are making a tradeoff; spending the money today instead of giving it the opportunity to grow into the future. So what are you trading?
What Is the Time Value of Money?
Future value plays on the concept of the time value of money—TVM. The time value of money is simply the idea that an amount of money is worth more today than in the future because you can earn a profit on it between now and then.
Here’s a simple example—if you’re given a gift of $5,000 and stash it in your closet for ten years, it will lose value due to inflation. You also aren’t giving it the potential to grow. If you put that $5,000 in a high-yield savings account or invested it in the stock market, it could grow over the next decade and have a significantly higher future value.
What Is the Future Value?
Future value, FV for short, is how much an asset is expected to be worth at a future date, based on the rate it’s assumed to grow at and the frequency of contributions. You can compare the future value of an investment with its present value.
Future value is a helpful tool for weighing a potential investment, letting you easily see how much your investment could potentially earn over time. You can calculate future value using simple interest or compounding interest.
Why You Should Calculate Future Value
The future value of money shouldn’t be your only consideration when you’re making a decision about your personal finances, but the FV calculation is a helpful tool for estimating the future impact of your financial choices.
Here are two of the biggest reasons to use the future value calculator:
- Financial planning: First, the future value is extremely helpful for investors looking to make their next move. It can provide an easy way to compare two investment options with different buy-ins and interest rates side by side. Future value can give you a general idea of how their performance could stack up over time, given an estimated average annual growth rate.
- Comparing investments: Future value isn’t only helpful for active investors. This concept can also help you to plan for future financial goals, like saving up for a downpayment or a new car. If you’re working with a set timeline, the future value calculator can tell you how much you need to save or invest to reach your goal. Or if you know how much you can contribute on a weekly, monthly, or annual basis, it can show you how long it will likely take you to get there.
Keep in mind: When you calculate the future value, just remember that investments don’t always go as planned. Interest rates change—unlike the future value calculator shows, the rate of return isn’t always the same from year to year.
And calculating the future value for annuities or inconsistent cash flows can be a bit more challenging. With annuities, you need to factor in PMT (annuity payment amount) and note the difference between ordinary annuities and annuities due. With ordinary annuities, payments are due at the end of each period. With annuities due, they’re due at the beginning of each period. The timing of these payments can make a difference in their future value.
As long as you keep in mind that future value is an estimate rather than a guarantee, it can be a quick, useful tool for setting financial plans and comparing the value of your investment options.
How the Future Value Calculator Works
The future value formula is a simple estimation tool that factors in these inputs:
- Contribution amount: You can enter any dollar amount here.
- Frequency of contributions: Set your contribution timeline based on how frequently you might contribute, from a one-time contribution to a yearly, monthly, weekly, or daily one.
- Expected investment annual return: Next, estimate the expected annual interest rate of your investment, on a sliding scale from 1.00% to 15.00%.
- Years of growth: Last, choose the number of years you’ll invest, from a scale of one to 100 years.
Calculating future value is simple, but the calculator can save you from having to break out a calculator yourself. It also makes it easy to tweak your contributions, return, and timeline quickly to see different calculator results.
Other Helpful Calculators
Tools like the future value calculator can take the headache out of financial planning. If you’d like to crunch some more numbers, we’ve built over a dozen free financial calculators to help you with everything from setting savings goals to making more money and retiring early.
These savings, income, and investment calculators are completely free and designed to help make reaching your financial goals easier. We don’t store any of the details you enter, so you can trust that your financial information is secure.
