Future Value Formula
Shown below is the future value formula and a description of each variable.
|FV=PV (1+ i)n|
|FV= Future Value
Future value is the amount we don't know. This is the value we will solve for in our calculations. It's the amount we will have in the future.
|PV= Present Value
Present value will be discussed in more detail in the next lesson but, for the moment, think of it as the money we have now or the amount of money that will be earning interest.
|i= interest rate
Interest rate has a great effect on future value. In our calculations, we'll apply a number of different interest rates to see how small changes in interest rates can lead to significant changes in the future value of your money. The interest rate in our formula must be written in decimal form: for example, 3% is 0.03.
|n= number of periods (such as years) money is saved and interest is applied.
"n" is how long we will save our money. If we know we want to save our money for 3, 5, 7 or 10 years, 3, 5,7 or 10 would be our "n" in a calculation. We'll apply a number of different "n" amounts to see how time affects future value.
Start With the Variables
Let's begin with our $50 piggy bank example.
|This Is Your Life: A Pocket Full of Change…|
|You have $50 in change in your piggy bank. You have no plans to spend it (no retailer will accept that much change). Instead of just leaving it in there forever, you could just as easily leave it sitting in a savings account forever. Let's call forever, oh, about 20 years. If your savings account is paying you 3% interest, how much will that $50 be in 20 years?|
How much money will you have in 20 years, if you save $50 in the bank at 3% interest? The first thing we have to do is replace the variables in the equation with the relevant figures in our scenario. Do you know what values to replace PV, i, and n with? Replace the variables with your answers in the text boxes below. Click Reveal Answer to see if you are correct.
FV=PV (1+ i)n
FV= (1+ )
FV=50(1+ .03 ) 20
Do your values match ours? 50 is the present value because that's how much money we have to start with that will be earning interest. 3% is our interest rate, so we write this as .03. (If you mistakenly input "3" instead of ".03," don't worry about it; just keep this in mind for future calculations.) Finally n=20 because n represents the number of years we plan to save.
Now, on to Calculation
OK. Let's walk through the steps of calculating this. Click here to view the demonstration.
On the Calculator
We performed the above calculation "behind the scenes," but if you'd like to see how we do this on a calculator (exponents can be tricky), click here to view a video demonstration.