Loading the player...

What is 'Future Value - FV'

Future value (FV) is the value of a current asset at a specified date in the future based on an assumed rate of growth.

If, based on a guaranteed growth rate, a $10,000 investment made today will be worth $100,000 in 20 years, then the FV of the $10,000 investment is $100,000. The FV equation assumes a constant rate of growth and a single upfront payment left untouched for the duration of the investment.

BREAKING DOWN 'Future Value - FV'

The FV calculation allows investors to predict, with varying degrees of accuracy, the amount of profit that can be generated by different investments. The amount of growth generated by holding a given amount in cash will likely be different than if that same amount were invested in stocks, so the FV equation is used to compare multiple options.

Determining the FV of an asset can become complicated, depending on the type of asset. In addition, the FV calculation is based on the assumption of a stable growth rate. If money is placed in a savings account with a guaranteed interest rate, then the FV is easy to determine accurately. However, investments in the stock market or other securities with a more volatile rate of return can present greater difficulty.

For the purposes of understanding the core concept, however, simple and compound interest rates are the most straightforward examples of the FV calculation.

Future Value Using Simple Annual Interest

The FV calculation can be done one of two ways depending on the type of interest being earned. If an investment earns simple interest, then the formula is as follows, where I is the initial investment amount, R is the interest rate and T is the number of years the investment will be held:

FV = I * [1 + (R * T)]

For example, assume a $1,000 investment is held for five years in a savings account with 10% simple interest paid annually. In this case, the FV of the $1,000 initial investment is $1,000 * [1 + (0.10 * 5)], or $1,500.

Future Value Using Compounded Annual Interest

With simple interest, it is assumed that the interest rate is earned only on the initial investment. With compounded interest, the rate is applied to each period's cumulative account balance. In the example above, the first year of investment earns 10% * $1,000, or $100, in interest. The following year, however, the account total is $1,100 rather than $1,000, so to calculate compounded interest, the 10% interest rate is applied to the full balance for second-year interest earnings of 10% * $1,100, or $110.

The formula for the FV of an investment earning compounding interest is:

FV = I * [(1 + R)T]

Using the above example, the same $1,000 invested for five years in a savings account with a 10% compounding interest rate would have a FV of $1,000 * [(1 + 0.10)5], or $1,610.51.

RELATED TERMS
  1. Compound Interest

    Compound interest is interest calculated on the initial principal ...
  2. Periodic Interest Rate

    The periodic interest rate is the interest rate charged on a ...
  3. Continuous Compounding

    Continuous compounding is the process of calculating interest ...
  4. Compounding

    Compounding is the process in which an asset's earnings, from ...
  5. Stated Annual Interest Rate

    A stated annual interest rate is the return on an investment ...
  6. Cumulative Interest

    Cumulative interest is the sum of all interest payments made ...
Related Articles
  1. Investing

    Understanding the Power of Compound Interest

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

    Continuous compound interest

    Different frequency in compound interest results in different returns. Check out how continuous compounding accelerates your return.
  3. Personal Finance

    Simple Interest Loans: Do They Exist?

    You'll find simple interest loans offered by a variety of loan products, including car loans. Use them to your advantage.
  4. Managing Wealth

    APR and APY: Why Your Bank Hopes You Can't Tell the Difference

    Do you know the difference between Annual Percentage Rate and Annual Percentage Yield? Check out how they can affect your own account balance.
  5. Investing

    Overcoming Compounding's Dark Side

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

    Understanding the Time Value of Money

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

    Using Compounding to Boost Retirement Savings

    Allowing growth on your investments to compound over time gives you immense returns when saving for retirement.
  8. Investing

    Investing $100 a month in stocks for 30 years

    Find out how you could potentially earn hundreds of thousands of dollars just by investing $100 a month in stocks during your working years.
  9. Financial Advisor

    Implications of the Federal Reserve's Impending Rate Hike

    The Federal Reserve begins its two-day meeting on Wednesday, September 16, and everyone is watching to see if the central bank will raise the United States target interest rate for the first ...
RELATED FAQS
  1. Simple versus compound interest

    Different methods in interest calculation can end up different interest payment. Learn the differences between simple and ... Read Answer >>
  2. Mutual Funds and Compound Interest

    Learn how mutual funds can grow wealth over time through the magic of compound interest by reinvesting dividends back into ... Read Answer >>
Trading Center