Next video:
Loading the player...

Future value is the value of an asset or cash at a specified date in the future that is equivalent in value to a specified sum today. Future value is calculated in one of two ways depending on whether or not the calculation uses simple or compound interest.

For simple interest the formula is:

Future Value = Current Value x (1 + (interest rate x number of years)

With an investment worth \$100 and a 7% interest rate, what will the future value be in 10 years?Â  Using the formula, the answer is:

100 * (1+ (.07 x 10) = \$170

The compounding future interest formula is:

Future Value = Current Value x ((1 + interest rate) ^ number of years))

Using the same \$100 and 7% interest rate, but compounding annually this time, the future value is:

100 * ((1+.07)^10)) = \$196.72

The compounding formula always generates a higher amount than the simple interest calculation.Â  This is because with compounding, each yearâ€™s earned interest is added to the original amount, and thus increases the amount against which interest is calculated in subsequent years.

Â

Â

## In This Series

6. ### What Is Inflation?

Related Articles
1. Managing Wealth

### Dissecting the Simple Interest Formula

Simple interest ignores the effect of compounding: it's only calculated on the principal amount. This makes it easier to calculate than compound interest.
2. Investing

### Learn Simple and Compound Interest

Interest is defined as the cost of borrowing money, and depending on how it is calculated, it can be classified as simple interest or compound interest.
3. Investing

### Understanding the Power of Compound Interest

Understanding compound interest is important for both investing and borrowing money.
4. Investing

### Accelerating Returns With Continuous Compounding

Investopedia explains the natural log and exponential functions used to calculate this value.
5. Investing

### 4 Ways Simple Interest Is Used In Real Life

Simple interest works in your favor when you're a borrower, but against you when you're an investor.
6. Investing

### Understanding the Time Value of Money

Find out why time really is money by learning to calculate present and future value.
7. Investing

### The Difference Between Enterprise Value and Equity Value

Enterprise value calculates a businessâ€™s current value, while equity value offers a snapshot of that businessâ€™s current and potential future value.
8. Investing

### Explaining Growth Rates

Growth rate refers to the amount a specific variable or measure has grown over a specified time, whether related to one company or an entire economy.
9. Investing

### Overcoming Compounding's Dark Side

Understanding how money is made and lost over time can help you improve your returns.
10. Investing

### What is Present Value?

Present value tells us how much a future sum of money is worth today, given a specified rate of return. This is an important financial concept based on the principle that money received in the ...
Hot Definitions
1. ### Preferred Stock

A class of ownership in a corporation that has a higher claim on its assets and earnings than common stock. Preferred shares ...
2. ### Net Profit Margin

Net Margin is the ratio of net profits to revenues for a company or business segment - typically expressed as a percentage ...
3. ### Gross Margin

A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. ...
4. ### Current Ratio

The current ratio is a liquidity ratio measuring a company's ability to pay short-term and long-term obligations, also known ...
5. ### SEC Form 13F

A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...
6. ### Quantitative Easing

An unconventional monetary policy in which a central bank purchases private sector financial assets in order to lower interest ...
Trading Center