How to Calculate Future Value
Understand how the value of money fluctuates over time., Learn about interest rates., Evaluate the worth of an amount of money today after a given period of time.
Step-by-Step Guide
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Step 1: Understand how the value of money fluctuates over time.
The value of $100 is different today than it was five years ago or will be five years from now.
When you invest money or deposit it into an interest-bearing account, the value will increase or decrease depending on the rate of return.
In addition, inflation affects the value of money.
Even though $100 may be enough to purchase an item today, it may not be enough to purchase that same item in the future.Interest rates cause the value of money in investments or interest-bearing accounts to increase.
Inflation causes the value of money to decrease by losing purchasing power. -
Step 2: Learn about interest rates.
The interest rate is the cost of borrowing money.
It is expressed as an annual percentage of the total amount borrowed.
You pay interest on loans and credit cards.
But banks, governments and other large companies also need to borrow money.
When you invest or make a deposit into an interest-bearing account, you are essentially lending money to that institution.
So they pay interest to you.The rate of return on an investment or deposit account is the amount of interest you are paid divided by the amount of dollars in the account or investment.
It is the gain or loss of money over a specific period of time.
It is expressed as an annual percentage of the original amount., The change in the value of money over time is calculated using information about interest rates and inflation.
If you want to evaluate the future value of an investment, you multiply the principal by the given interest rate.
If you want to estimate your purchasing power over time, you consider how interest rates are increasing the value of money and how inflation is decreasing it.The nominal interest rate is the stated interest rate on a loan or rate of return on an investment.
The real interest rate is the nominal interest rate minus the rate of inflation.
So if you have an investment with annual rate of return of 10 percent, and the rate of inflation is 4 percent, then your real rate of return is 6 percent.Understand the difference between simple and compound interest.
Simple interest is the principal amount multiplied by the interest rate and the number of accounting periods in a loan or investment.
Compound interest is calculated in the principal amount plus any accrued interest from previous periods.Compound interest accrues, or increases, much more quickly than simple interest. -
Step 3: Evaluate the worth of an amount of money today after a given period of time.
Detailed Guide
The value of $100 is different today than it was five years ago or will be five years from now.
When you invest money or deposit it into an interest-bearing account, the value will increase or decrease depending on the rate of return.
In addition, inflation affects the value of money.
Even though $100 may be enough to purchase an item today, it may not be enough to purchase that same item in the future.Interest rates cause the value of money in investments or interest-bearing accounts to increase.
Inflation causes the value of money to decrease by losing purchasing power.
The interest rate is the cost of borrowing money.
It is expressed as an annual percentage of the total amount borrowed.
You pay interest on loans and credit cards.
But banks, governments and other large companies also need to borrow money.
When you invest or make a deposit into an interest-bearing account, you are essentially lending money to that institution.
So they pay interest to you.The rate of return on an investment or deposit account is the amount of interest you are paid divided by the amount of dollars in the account or investment.
It is the gain or loss of money over a specific period of time.
It is expressed as an annual percentage of the original amount., The change in the value of money over time is calculated using information about interest rates and inflation.
If you want to evaluate the future value of an investment, you multiply the principal by the given interest rate.
If you want to estimate your purchasing power over time, you consider how interest rates are increasing the value of money and how inflation is decreasing it.The nominal interest rate is the stated interest rate on a loan or rate of return on an investment.
The real interest rate is the nominal interest rate minus the rate of inflation.
So if you have an investment with annual rate of return of 10 percent, and the rate of inflation is 4 percent, then your real rate of return is 6 percent.Understand the difference between simple and compound interest.
Simple interest is the principal amount multiplied by the interest rate and the number of accounting periods in a loan or investment.
Compound interest is calculated in the principal amount plus any accrued interest from previous periods.Compound interest accrues, or increases, much more quickly than simple interest.
About the Author
Jeffrey Reed
Experienced content creator specializing in organization guides and tutorials.
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