Most people who make investments choose to space them over time, case in which they want to find out the future value of the investment. For example, a monthly extension of the 401k plan is one of the most common types of investments. At the same time, there are other options, such as purchasing an annuity. For the latter, it is necessary to find out the future value you will obtain from your investment. There are many online calculators and formulas so anybody can learn how to calculate future value in no time.
How to Calculate Future Value on Your Own
Today we will present you three different methods to calculate future value. The first one relies on a future value of money formula, the second on a future value of money calculator, and the third uses a spreadsheet. Despite the three of them using various ways of calculating, the base formula is identical for all three cases.
The Formula for Calculating Future Value
Let’s take the case of a person who has $100, with an interest rate of 5%. The person wishes to know what value of investment they will have in one year. The formula for finding out the future net worth is the following:
FV1 = PV + INT or PV(1 + I)n
The beginning of the formula (up until or) can be read as the future value (FV) after one year (the subscript 1) is equal to the present value (PV) to which you add the value for the specific interest rate (INT).
The second part, which is an alternative to the first formula, presents an easier way of calculating. With it, you can find out the value brought by the accrued interest. It reads that the present value (PV) times (1 + I)n. Here, I stands for the interest rate, while the superscript n shows how many compounding periods there are.
Applying the Formula
Taking the example we used in the beginning, let’s apply the formula to the $100. For an investment with an interest rate of 5% we have:
FV = $100(1 + 0.05) = $105
There is no superscript n here because we are currently calculating the formula only for year one. The calculation for two years’ time is the following:
FV = $100(1 + 0.05)2 = $110.25
This is an interesting problem. If you want to know how to calculate future value of an investment after one year, you can multiply the result by the 5% interest rate for year two as well.
FV = [$100(1+0.05)] + [$105(1+0.05)] = $100.25
This formula is applicable to as many compounding periods as you need, depending on your plans. It is a clear and easy way to see how you get to a certain result. However, the downside of this method is the fact that it takes more time than the rest. For instance, if you want to calculate the future value in 20 years, you need to repeat the calculation 20 times. In this case, it would be better to use a calculator.
Taking Advantage of a Financial Calculator
If you want to do the calculations above with the help of a financial calculator, you should use the formula:
FVN = PV(1 + I)n
Even though it may look different, it is, in fact, the formula we used before. It can be used on all the calculators that support exponential functions. Thankfully, most of them do. This method is clearly better since you already have dedicated keys for all the variables you’re using. It speeds up the entire process and it is less likely for a mistake to take place. The keys you need are the following:
- N & 2 (for a 2 years’ calculation);
- I/YR & 5 (the interest rate is 5%);
- PV & -105 (how much money you need to see the interest for on for the second year);
- PMT & PMT (no payments after the first payment);
- FV (it shows the answer, which is $110.25).
By using this future value of money calculator, you will save up a lot of time. Moreover, it’s easier to make more complicated calculations, such as seeing the future value after 20 years. However, there is still a third method for seeing the future value of your investment.
Make Use of a Spreadsheet
If you don’t know what a spreadsheet is, think about Microsoft Excel. Choosing how to calculate future value can be confusing, but these are great for solving various money problems. The feature you need to use if you choose this method in Excel is:
For using it in Excel, you must go to the top menus and click on Formulas. Then, select Financial and you will see various functions appear. Click on the FV option. Next, you will see a Formula Builder option. There are 5 boxes there: rate, pmt, nper, pv and type. For those who want to find out the result for two years, complete the options as you see here:
- Rate = .05 (the interest rate)
- Nper (how many payment periods you have in total) = 2
- Pmt (if you repeat any payments) = 0
- Pv (a negative number of the present value) = -100
- Type (scheduling of other subsequent payments) = 0
With some previous versions of Excel, you may also need to select Calculate. However, newer versions present you the result instantly.
Online T Value Calculator
This is another option that can be useful when you want to know how to calculate future value. This type of calculator comes in handy for statistical tests. You can use it whenever you want to calculate a t statistic, for example, the unpaired and paired t-tests for students. The t statistic wears this name because it has a student’s t-distribution. Thankfully, there are plenty of online calculators that can help you in this case.
Even though it may seem complicated, it’s not hard to learn how to calculate future value of your investment. There are three different ways to do that, and if you want, you can also use an online t value calculator. You just need to understand the formula to be used, which you can apply automatically with the help of a calculator or a spreadsheet.
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