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The Present Value of Your Dreams

Life Questions

This is the last lesson of this course. So far, you've prepaid for your retirement party, saved for a house and saved for a wedding. Those are all very responsible financial decisions to have made. But you also have $10,000 from your grandma waiting to be used. What about the stuff you only dream about? How can you start planning for those decisions? Better yet, what if you won the dream of most… the lottery! How would you accept your winnings? Would you know which type of payment would best suit your needs? Take a moment and consider the following:

Win the lottery and take a single, lump-sum payout today, or…
win the lottery and take 26 equal payments over 25 years?

If you won the lottery, which do you think you would take… and why?

In this lesson, we'll talk about present value. We'll discuss how understanding present value can help you plan for your future, even for things that maybe you've only dreamed about. We'll even think through the dream of all dreams—winning the lottery. Present value has a significant effect on lottery winnings and understanding it will help you understand the difference between a payment now and payments over the course of 26 years.

After completing this section of the course, you should be able to:

  • recognize the definition of present value,
  • explain what present value means,
  • explain the components of the present value equation,
  • replace the variables in the present value formula with values from scenarios described and
  • use an online calculator to compute present value.

As a final review of present value and future value, watch the following video. Click the play button to learn more!