You'd like to buy a house some day. Say you've graduated from college and, in your first year of work, you receive a $9,000 bonus. If you put that $9,000 in the bank when you are 25 and save it for 10 years at 3% interest, how much will you have by the time you are 35? If you need $11,000 for a down payment on your first house, will you have enough?
When faced with such a financial decision, you'd probably like to have a better means of knowing the answers to these questions than just guessing. Where's a good crystal ball when you need one? How do you know if the better decision is to spend or save if you don't have a pretty good idea of how saving will pay off in the long run? In comes our financial crystal ball. While nothing can absolutely predict the future and tell us what's in store, we do have a few tools at our disposal to help take some of the guesswork out of understanding what money will be worth in the future.
In this lesson, we're going to learn about future value. It's not really science fiction; it just sounds like it! In reality, it will help you predict with a great deal of accuracy the results of saving your money for the future. By the end of the lesson, you'll have transformed your predictions from random guesses to calculated estimations.
After completing this section of the course, you should be able to:
- recognize the definition of future value,
- explain what future value means,
- explain the components of the future value of money equation,
- correctly replace the variables in the future value formula with values from various scenarios and
- use an online calculator to compute future value.