Future Value Explained: How to Calculate Future Value

Future value (FV) is the future value of money or assets according to an assumed growth rate. Future value uses the time value of money to estimate how money today can be worth more at a future date. Future value is used in personal financial planning and corporate finance to determine the value of investments, expand portfolios, and predict future cash flows.

Future value allows investors and corporations to weigh the value of an investment. The future value of an investment changes based on the amount of money invested, the rate of return, and the timeframe of the investment. This valuation tool is most accurate for financial decision-making when the investment involves a constant rate of interest.

The type of future value influences how FV calculations are made.

1. 1. Simple interest: Simple interest is the future value of a lump sum of money. With simple interest, interest accrues on the initial investment but not on the growing sum as it accumulates interest.
2. 2. Compound interest: Compound interest earns interest on both the money from the initial investment as well as accumulated interest. The same initial investment will result in a higher account balance with compound interest than an investment in a simple interest structure.
3. 3. Annuity: This type of future value accumulates with a series of payments over a period of time rather than one lump sum at the outset accruing interest. A payment made at the end of a recurring period is called an ordinary annuity. A payment made at the beginning of a recurring period is called an annuity due.

Investors and financial analysts use future value calculators and future value formulas to identify the future value of investments. Follow these general steps to calculate future value.

1. 1. Identify the type of future value. Before calculating future value, identify the type of future value for your particular investment: simple interest, compound interest, or annuity.
2. 2. Choose the appropriate formula. Once you’ve identified the type of future value, choose the appropriate formula. For simple interest, the formula is FV = PV [1 + (i x t)]. For compound interest, the formula is FV = PV [1 + (i/n)]^(n x t). For annuities, the formula is FV = PMT [(1 + i)^n – 1] / i.
3. 3. Plug values into the equation. For these formulas, “FV” equals future value, “PV” equals present value, “i” equals annual interest rate, “n” represents the number of compounding periods, “t” represents the number of years, and “PMT” equals each annuity payment in dollars. Apply numbers to each variable based on your specific investment.
4. 4. Solve for future value. Use the formula to solve for future value. Pay attention to the order of operations as you work through the equation. When solving, consider using a financial calculator to find future value.

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