There are two ways to calculate Future Value (FV):
1) For an asset with simple annual interest: = Original Investment x (1+(interest rate*number of years))
2) For an asset with interest compounded annually: = Original Investment x ((1+interest rate)^number of years) Consider the following examples:
1) $1000 invested for five years with simple annual interest of 10% would have a future value of $1,500.00.
2) $1000 invested for five years at 10%, compounded annually has a future value of $1,610.51.
When planning investment strategy, it's useful to be able to predict what an investment is likely to be worth in the future, taking the impact of compound interest into account. This formula allows you (or your calculator) to do just that:
Pn = P0(1+r)n
Pnis future value of P0
P0 is original amount invested
r is the rate of interest
n is the number of compounding periods (years, months, etc.)
Note in the example below that when you increase the frequency of compounding, you also increase the future value of your investment.
P0 = $10,000
Pn is the future value of P0
n = 10 years
r = 9%
Example 1- If interest is compounded annually, the future value (Pn) is $23,674.
Pn = $10,000(1 + .09)10 = $23,674
Example 2 - If interest is compounded monthly, the future value (Pn) is $24,514.
Pn = $10,000(1 + .09/12)120 = $24,514
To read more on this subject, see Continuously Compound Interest and Accelerating Returns With Continuous Compounding.
Present Value And Discounting
InvestingFuture 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.
InvestingInterest is defined as the cost of borrowing money, and depending on how it is calculated, can be classified as simple interest or compound interest.
InvestingThe effective annual interest rate is a way of restating the annual interest rate so that it takes into account the effects of compounding.
InvestingUnderstanding how money is made and lost over time can help you improve your returns.
Managing WealthSimple interest ignores the effect of compounding: it's only calculated on the principal amount. This makes it easier to calculate than compound interest.
RetirementAllowing growth on your investments to compound over time gives you immense returns when saving for retirement.
InvestingHow much are your investments actually returning? Find out why the method of calculation matters.
Personal FinanceBanks use these rates to entice borrowers and investors. Find out what you're really getting.
InvestingInterest is the price charged to borrow money, and is typically expressed as a percentage of the principal, or the amount loaned.
InvestingSimple interest works in your favor when you're a borrower, but against you when you're an investor.