A dollar received today is worth more than a dollar received yesterday. That is the essence of the time value of money. This core principle of finance holds that, provided money can earn interest, any amount of money is worth more the sooner it is received.

It is essential to understand the time value of money concepts and formulas presented below, but reliance on the formulas alone is not realistic to pass the CFP exam. Exam takers also must master the use of a financial calculator to have any realistic chance of passing the exam.

There are several different brands of financial calculators available on the market, but the financial calculator of choice for CFP exam takers is the HP 12C by Hewlett Packard.

Reference:

Present value
The amount that a future lump sum is worth today given a specified rate of return.

An investment that earns 10% per year and can be redeemed for \$1,000 in five years would have a present value of \$620. In other words, \$620 today is worth \$1,000 in five years.

 FormulaPV = FV / (1 + i)n
FV = future value
PV = present value
I = interest rate
N = compounding period

Future value
The value of an asset or cash at a specified date in the future that is equivalent in value to a specified sum today.

 FormulaFV = PV(1+i)n

FV = future value
PV = present value
I = interest rate
N = compounding period

Consider the following example:

\$1000 invested for 5 years at 10%, compounded annually has a future value of \$1,610.51.

FV = \$1,000(1+.10)5
= \$1,000(1.10)5
= \$1,610.51
Ordinary annuity, Annuity Due and Net Present Value

Related Articles
1. Investing

### Calculating Future Value

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.
2. Investing

### Understanding the Time Value of Money

Find out why time really is money by learning to calculate present and future value.
3. 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.

### The Best Training Programs For CFP Exams

The competition to become a financial planner is hot, and growing hotter. Find out the best way to preparing to land the CFP designation.
5. Retirement

### How to Calculate the Value of Annuities

Here's everything you need to account for when calculating the present and future value of annuities.
6. Investing

### Calculating Present Value Interest Factor

The present value interest factor is a number that makes it easier to calculate the present value of a payment or value to be received in the future.

### Tips on Passing the CFA Level I on Your First Attempt

Obtain valuable tips and helpful study instructions that can help you pass the Level 1 Chartered Financial Analyst exam on your first attempt.

### Hiring a Financial Advisor? Look for the CFP Label

Donâ€™t skimp on the CFP designation. Here's why those three letters show that someone is qualified in financial and investment planning.

### How Hard are the CFA Exams?

Learn about the difficulty of the CFA exams with a description of the tests, some statistics on pass rates and suggestions that can help you pass the exams.