Future value calculator is a smart tool that allows you to quickly compute the value of any investment at a specified moment in the future. You need to know how to calculate the future value of money when you want to know the value of any investment at a specific date in the future. Usually, you’ll use the future value formula when you want to know how much an investment will pay off.
Read on this article to find answers for the following questions:
- What is the time value of money?
- What is the future value?
- What is the future value formula?
- How to calculate future value?
- What is the difference between future value and present value?
- How can you use future value in making wise financial decisions?
And last but not least, in the text below, you will find out how to use our incredible future value calculator to make your financial decisions faster and smarter.
The time value of money
When explaining the idea of future value it is worth to start at the very beginning. First of all, you need to know that the underlying assumption of future value is the concept of the time value of money. Actually, this idea is one of the core principles of financial mathematics. However, we believe that understanding it is quite simple even for a neophyte in finance.
Let’s start with a simple question. Do you prefer to get one hundred dollars today or one hundred dollars after a year from today? If your answer is one hundred today, it means that you intuitively feel the idea of the time value of money. This concept says that one hundred dollars today is worth more than one hundred dollars tomorrow, or more generally: money that is available now is worth more than the same amount in the future.
Are you wondering why it is so? Why is the same amount of money worth more today than in the future? The answer lays in the potential earning capacity of the money that you have now. Note that when you have one hundred dollars from our example, you can put it in your savings account (or make any other investment), and after a year, you will receive more than your initial payment. In fact, it will be one hundred dollars plus additional interest. In the formal way, economists say that the future value of money is equal to its present value increased by interest. The question that appears here is how to actually calculate this future value of one hundred dollars. Keep reading, and we will try to explain this in details.
Future value definition
By definition future value is a value of the particular asset at a specified date in a future. In other words, future value measures the future sum of money that a given investment is worth after a specified period assuming a certain rate of return (interest rate). More formally, the future value is a present value multiplied by the accumulation function. The former is a function that is defined in terms of time and expresses the ratio of the future value and the initial investment.
Why you need to calculate future value?
It’s important to know how to calculate future value if you’re a business owner, or indeed any owner of appreciable assets. Once you know how valuable your assets currently are, it’s important to know how valuable they will be at any given point in the future. That way, you can plan more intelligently for what’s to come. It’s important to use a future value calculator in order to get around the problem of the fluctuating value of money. Ultimately, money is our way to assign a number to value. That’s why understanding how to calculate the core value of assets, in the present and in the future, is so crucial.
Future value formula
In its simplest version, the future value formula includes the asset’s (or the investment) present value, the interest rate, and the number of periods between now and the future date.
Taking into account these variables, you can present the future value equation in the following way:
FV = PV * (1 + r) ^ n
- FV – future value
- PV – present value (the initial balance of your investment)
- r – interest rate (expressed on an annual basis)
- n – the number of periods (years) the money is invested for.
This formula is applied to investments in which the compounding period is the same as the period for which the interest rate is calculated (e.g., a yearly compounding and an annual growth rate). Sometimes, however, the interest is compounded on a more frequent basis (quarterly or monthly). In such cases to obtain the future value of your investment you need to use a more complex formula:
FV = PV * (1 + r / k) ^ (n * k)
- k – the compounding frequency (the number of times the interest is compounded per year).
If you don’t know all the values in this equation, feel free to use our present value calculator to assess your investment’s value at the present moment, and our compound annual growth rate (CAGR) calculator to be sure you plug in the correct interest rate. Usually, the period will be one year as interest rates are often calculated annually.
How to calculate future value? – examples of calculations
Do you want to understand the future value equation? Are you curious how to calculate the future value on real-life examples? Do you need to know how to compute the interest rate that will give you a certain profit within the specified period? Or maybe you want to know how much time it will take you to multiply your initial investment?
We have prepared a few examples to help you find answers to these questions. After studying them carefully, you shouldn’t have any troubles with understanding the concept of future value. We also believe that thanks to our examples, you will be able to make smart financial decisions.
Example 1 – Calculating the future value
The first example is the simplest case in which we calculate the future value of an initial investment. Assume that today you make a single deposit of $1,000. The annual interest rate is 4% and it is compounded yearly. What is the future value of this investment after 3 years?
Basing on the future value formula presented in the previous section we can calculate:
FV = $1,000 * (1 + 0,04) ^ 3 = $1,000 * 1,1248 = $1,124.8
The value of your deposit after 3 years (the future value) is than $1,124.8.
Let’s check now what will be the future value of the initial amount ($1,000) if the annual interest rate is compounded monthly. This time the formula for future value is:
FV = $1,000 * (1 + 0,04 / 12) ^ (3 * 12) = $1,000 * 1,1273= $1,127.3
This time the future value of your deposit is $1,127.3. Have you noticed that this value is higher (by $2.44) than previously and the only thing that has changed is the compounding frequency? You can say then that the more frequent the compounding, the higher the future value of the investment.
Example 2 – Calculating the present value
In the next example, we will show you how to calculate the present value of any investment. Let’s assume that you make a deposit today and want the amount deposited to grow to $8,000 at the end of 5 years. Knowing that the annual interest rate compounded annually is 3%, calculate the present value of the deposit. In other words, you can ask what amount you need to invest today in order to have $8,000 after 5 years?
The very base transformation of the future value formula allows you to compute the future value:
FV = PV * (1 + r) ^ n
PV = FV / (1 + r) ^ n
PV = $8,000 / (1 + 0,03) ^ 5 = $6,900.87
In our example, if you want to have $8,000 after five years, the initial deposit should be equal to $6,900.87.
Let’s consider now what will change if we assume a different compounding period, for example, a quarterly compounding (
k = 4).
The respective formula for present value is:
PV = FV / (1 + r / k) ^ (n * k)
PV = $8,000 / (1 + 0,03 / 4) ^ (5 * 4) = $6,889.52
This time the initial deposit should be equal to $6,889.52. Have you noticed that this amount is slightly lower than previously? It is the result of the more frequent compounding.
Example 3 – Calculating the number of time periods
In the third example, let’s consider another type of question. Firstly, let’s assume that you make a simple deposit of $1,000. The same as in the first example, the annual interest rate is 4%, and it is compounded annually. How many years will it take your deposit to have a future value of $1,200?
To obtain the result, first of all, we need to transform the future value equation in the following way:
FV = PV * (1 + r) ^ n
When both sides are divided by
FV / PV = (1+r) ^ n
log₁₊ᵣ (FV / PV) = n
If the compounding period is not the same as the period for which the interest rate is calculated the formula is:
(log₁₊ᵣ/ₖ (FV / PV)) / k = n
Now, let’s try to put values from the example into this formula:
n = log₁,₀₄ (1200 / 1000) = 4,65
It means that it will take 5 annual periods for a $1,000 deposit to go from its present value to the future value of $1200.
What will change if we assume a monthly compounding period? We suggest you try to work it out by yourself. Remember that you can always check your results with our future value calculator – it works in each direction, depending on the values you provide.
Example 4 – Calculating the interest rate
In this example, we present how to calculate the interest rate that is earned on the given investment. The initial balance of the considered investment which is made today is $15,000. After four years the payoff (future value) from this investment will be $17,000. Assuming that the interest is compounded on an annual basis, what is the yearly interest rate of this investment?
Similarly as in the previous example, let’s start with a transformation of the future value formula:
FV = PV * (1 + r) ^ n
Firstly, you need to divide both sides by
FV / PV = (1 + r) ^ n
Then raise both sides to the power of
1 / n
(FV / PV) ^ (1 / n) = 1 + r
The last step is to deduct
1 from both sides:
(FV / PV) ^ (1 / n) – 1 = r
When the compounding period is not the same as the period for which the interest rate is calculated:
((FV / PV) ^ (1 / n * k) – 1) * k = r
So the solution of our example is as follows:
r = (17,000 / 15,000) ^ (1 / 4) – 1 = 3.18%
The yearly interest rate in the considered investment is then 3.18%.
Try to calculate the annual interest rate in this investment if interest is compounded monthly. Is this interest rate higher or lower than interest rate from the example? What is the reason for that? Once again, in case you are not sure about your results, feel free to use our calculator – it is able to compute the interest rate basing on the other information you provide.
How to use the future value calculator?
Now, when you know how to compute the future value, you can try to make your calculations faster and simpler with our future value calculator. This calculator is a tool for everyone who wants to make smart and quick investment calculations. It is also highly recommended for any investors, from shopkeepers to stockbrokers.
With our calculator obtaining the future value of your investment is easier than you thought. To compute the future value of any investment you don’t need to memorize any formula or to perform any calculations. All you need to do is to fill the appropriate fields in our calculator:
- present value – type in the amount of money you are going to invest (it’s the initial deposit)
- interest rate – provide the interest rate on your investment expressed on a yearly basis
- period – here you should type in the number of years you are going to invest money (it’s the period of investment)
- compound frequency – select the compounding frequency. Usually, the interest is calculated daily, weekly, monthly, quarterly, half-yearly or yearly
That’s it! Within less than a second, our calculator makes all computations and displays the results. They are shown in a field future value where you could see the future value of your investment.
Did you know that you can also use the future value calculator the other way round? For example plug in the present value, the future value and the interest rate to find how many time you need to get the provided future value.
In conclusion, future value calculator helps you make a smart financial decision. With the mobile version of our application, you are also able to use our FV calculator whenever and wherever you want.