A future value calculator is quite simple to use and is designed for anyone’s use. The calculator’s set-up is basically a 3-step process.
- Enter in the amount of money that is going to be invested.
- Next, key in the number of years the money is going to be invested.
- Lastly, enter amount of interest estimated to accrue or grow annually based on the amount to be invested and the number of years that the money is going to be invested.
This 3-step process of calculating a future value is known as a “Future Value Formula.” The formula when written in its algebraic format, can appear to be quite intimidating yet is easy to understand. The formula appears as follows:
Future Value-FV equals, the Present Value-PV times the annual interest rate (i)
The formula should look like this FV=PV(1+i) t (time), which means the present value of the money multiplied by the first year plus the interest rate multiplied by the time, as in number of years the money is being invested depending on certain factors such as compound interest.
Interpreting The Information
Interpreting the data and information needed in order to make a clear and objective decision pertaining to one’s economic future is important. With so much information available an individual might become overwhelmed with what information is relevant and what isn’t. Terms such as “future value of money and compound interest” have become familiar terms with the public due to the availability of information about business and Wall Street thanks to cable television, magazines and the Internet. In order to utilize a future value calculator an understanding of what formula to use and why that particular formula is used is necessary.
If an individual wanted to invest a certain amount of money such as $10,000.00 at an interest rate of 6% and the investment is for a period of 3 years, at the end of those years the investment will have grown from $10,000.00 to $ 11,910.16. Using the future value calculator enables a series of projections to take place based on the amount of money invested along with the interest at an annual rate.
Each future value calculator is slightly different but the principal is the same. The initial investment of money is then multiplied by the number of years the investment will take place times the annual interest rate, will equal a future value. Does the $10,000.00 investment presently equal the value of the $11,910.16? The answer is no; however, the calculation is what the money has the potential of growing into.
Why Calculate
Calculating on the potential growth of an investment is valuable because it allows for the investor to gain an insight as to how his or her money can grow. This method of calculating and projecting future monetary growth, can turn a novice investor into a wealthy investor. However, as with any upturn in any monetary market with growth also comes the risk of losing one’s money.
Economists, financial analysts and stock brokers like to use various complex mathematical formulas when projecting activity in the financial markets. This type of statistical compilation of data and other information is vital when making any investment decision.
For example to calculate the annuity (a fixed payment over a period of time based on the amount invested), using the future value calculator a projection of how much annuity was earned can be calculated. This is called a “Future Value Of Annuity” and can be calculated with interest or not. The amount paid is calculated into the calculator in dollar amounts, then the interest rate is calculated, the number of periods is calculated and finally all the information is culminated and the result is the amount of annuity earned in dollar amounts.
A future value calculator is a very useful tool in determining the time value of money. Money calculated with the interest at certain time period, can determine the value of the money invested. Understanding how to calculate the future value of the cash flow can make investing the money more objectively for the investor. Cash flow is receiving money in increments at certain periods of time. Learning to use any financial tool in the case of a future value calculator, takes a little research. The calculator is easy to use and is a great tool to any investor whether the professional investor or novice.
