Predicting the Future (Future Value, That Is)
- Future value is the value of an asset or cash at a specified date in the future
that is equal in value to a specified sum today.
- The future value formula is FV=PV (1+i)n
- FV stands for future value—It is the unknown amount. It is the value solved
for in the calculation. It's the amount to have in the future.
- PV stands for present value—This will be discussed in more detail in the
next lesson but, for the moment, think of it as the money you have now or
the amount of money that will be earning interest.
- i stands for the interest rate—The interest rate has the greatest effect
on future value. Small changes in interest rates can lead to significant
changes in the future value of your money.
- n stands for the number of periods (such as years) money is saved and interest
is applied. If you know you want to save your money for 3, 5, 7 or 10 years,
3, 5,7 or 10 would be the "n" in a calculation.
- You can also calculate the future value of equal sums of money you plan to save
at regular intervals over a period of time. This is called an annuity. The
formula for calculating the future value of annuity payments is:
= (A/i)[(1+i)n – 1], where
A is the annuity (or the amount of equal payments you plan to make); i is
the interest rate; and n is the number of payments you'll make.
- If inflation rates become higher than savings interest rates, this does NOT mean
you shouldn't save. One does not negate the other. Even if you lose some buying power, there are still important reasons to save. Simply put, it will
be much better to retire with money that may not buy quite as much as it
did 20 years ago than to retire with no money at all!