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If you invest a lump sum of money at a certain percentage return and don't touch it for a number of years, you'll end up with more than you started with. But how much more?

Getting the answer to that question involves using a future value formula. Using our future value calculator lets you determine how much you will have at the end of your investment term.

If you're not happy with the number, you can either invest more, choose a different investment, or perhaps get a longer time horizon. People trying to understand how their investments will look in the future often have a lot of questions. Below are some questions we hear often.

FREQUENTLY ASKED QUESTIONS


What does a future value calculator do?

A future value calculator allows you to find the future value of any investment without having to figure out the math yourself.

For instance, with our future value formula calculator you can enter:

  • The amount you have to invest
  • The start and end date of your investment
  • The annual rate of return
  • The compounding period

And voila! You'll have the future value of your investment immediately. You don't have to do the figuring -- we take care of it for you!

Wait, There's More!

After you understand the time value of money and how to compare different investments, you can compare a wide variety of fixed-interest investments.

Have fun using the future value formula to discover how much a different compounding period matters, especially over multiple years!

You may also enjoy trying our other investment calculators. We can help you understand internal rate of return, mutual funds, and more. With this information, you'll be equipped to make the best investment decisions for your situation.

Why is the time value of money important?

You might think that $100 today is the same as $100 next year, but that's not true at all. In fact, if you had $100 today it could be worth more than $100 next year because you could invest it and get a return.

As a result, the time value of money states that money today is more valuable than money in the future. To determine exactly how much more valuable, you have to figure out how much more it could be worth. This requires you to calculate the future value.

Compound Interest

Another important element when it comes to future value is compounding. Compounding is when you earn interest on the interest that was deposited in your account last period.

For instance, with yearly compounding, you would get interest in year two on your investment plus the interest deposited in year one.

The more often the interest compounds, the more you will earn. Monthly compounding means interest is deposited each month, driving your balance and future interest higher monthly. If this happens daily, it's even better!

Why does future value matter?

Future value matters because you want to know what to expect from your investments. The answer to, "Will I have enough to retire" relies on a fairly complex future value formula.

On the other hand, you can answer, "How much will I earn from this bank CD" with a much simpler formula, which we provide in our future value calculator.

It's also important to understand future value because you want to know what you're giving up if you choose to spend your money or choose a different investment. You can answer questions like, "Is this CD better than this annuity" by comparing the expected future value of each one.

What is the future value formula?

The future value formula is:

    FV = C (0) x (1 + r) n

Where, FV is the future value, and it's the result of the equation.

The C(0) is the cash flow at period 0, which is your initial investment.

The r is the rate of return in the compounding period. This means that for 6% a year compounded monthly, the r is .06/12, or .005.

Finally, n is the number of periods of compounding. Something that compounds monthly would have 12 periods of compounding per year, and something that compounds daily would have 365 per year.

What's an example of a future value calculation?

Based on the formula above, let's look at an example future value calculation.

Let's say you have two choices for investing $1000. Which one is better after one year?

First Investment Option

You can choose an investment that returns 7% per year, compounded monthly.

Second Investment Option

Or, you can select an investment that returns 6% per year, compounded daily.

Analysis

In the first case, you want to take:

    $1000 x (1 + (.07/12)) 12

    $1000 x (1 + .0058) 12

    = 1071.86

The future value after one year is $1071.86.

The second investment is:

    $1000 x (1 + (.06/365)) 365

    $1000 x (1 + .00016) 365

    = 1060.13

The future value after one year is $1060.13.

As a result, the first investment is a better choice.

As you can see, knowing the future value helps you make more informed choices with your money.

When should future value be calculated?

Future value is easiest to determine if you assume you are investing the entire amount at a single fixed interest rate. This would happen if you put your full $100 into a bank CD that lasts one year. At the end of the year, you would have your $100 plus interest.

Any time you are investing a specific amount of money all at once, and getting a set rate of return for a number of months or years, you are using future value.

That means, this calculation is important any time you are choosing to buy a CD, annuity, or other fixed-return investment.

These investments can have different rates of return, different compounding periods, and different lengths of investment. It can be hard to compare "apples to apples" unless you have the future value formula.

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