Future value calculation refers to calculating the value of a current asset at a future date based on specific parameters and projections regarding its growth. Investors and financial planners consider the calculation of future value crucial as it helps them estimate the future value of investments made today.
The future value is usually considered a rational calculation for financial investments. Individuals can also use future value calculation to ensure that their investments and returns align with their personal goals.
It has become effortless to perform future value calculation since you can find many future value calculators online. You can plan better by using a digital future value calculator because it will allow you to input different figures depending on the returns you want to earn or the amount you can afford to pay right now.
The future value calculators available online usually include a formula box, wherein you must enter initial investment details, periodic investments, rate of interest, and the number of periods. By entering these values, you can calculate the future value of your planned investment.
Use of Future Value Calculator
To use a future value calculator accurately, you need to enter the following details:
Present value sum
Number of periods, typically mentioned in years
Interest rate
Frequency of compounding
Cash flow payments
Increasing perpetuities and annuities
It is important to understand how a future value calculation helps and the different reasons it can be used for. Read on below to learn the benefits of future value calculation.
Enables Planning
Most financial institutions and individuals require financial planning. If an investor has some assets today and a general understanding of the market forces for the next few years, they can derive the future value of their assets and gain an enhanced understanding of their future financial standings..
Makes Comparisons Easier
A future value calculation also helps make it easier to decide between investment plans. For instance, if an investor is considering plans. One requires them to invest Rs. 4,200 every month, but the other plan requires them to invest Rs. 5,200 every month for more handsome returns. By using a future value calculator, an investor can assess which investment plan would do better over the future and opt to invest there..
Easy to Calculate:
With the digital future value calculators available online, it has become easier to calculate the future value of assets and make informed investment decisions. Knowing the future value of an asset is crucial to assessing its investment value, and now that it is so easy to do, every individual can invest more prudently.
Returns Above Inflation:
By checking the future value calculation, you can determine the investment required to achieve returns that beat inflation levels over the years. You will receive a meagre profit on your asset if most of the returns are lost to inflation costs.
Allows for Corrections:
Your investment goals are bound to change over the years. For example, from setting aside funds for meeting your education and wedding goals, your investment goals may become more geared towards your children’s futures over time. At such times, you must revise your investments and opt for tools more aligned with your current goals.
Formula to Calculate Future Value
The future value formula for a lump sum amount, which is the most common amount deposited, is
FV=PV(1+i)n
The present value (PV) grows yearly by a factor of 1+i.
Multiple variables are factored in while performing the future value calculation. These include:
The present value sum
The number of years or the time period
Rate of interest
Frequency of compounding
Cash flow payments
Increasing perpetuities and annuities
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If there is any variable whose value you feel unable to fill in at the moment or wish it to be excluded, you can always enter 0 in its place. Read below to understand the inputs required to enter for your future value calculation.
Present value (PV):
The present value refers to the asset's current value in monetary terms.
Number of periods (t)
Make sure you enter the same unit for time (month or year) throughout the form to ensure consistency and accuracy of results. If you are looking for perpetual annuity, enter p or perpetuity.
Interest Rate (R)
Enter a real interest rate you are expecting your asset to appreciate.
Compounding (M)
Decide the number of times compounding should occur during each period.
Enter 1 in the field if you require only annual compounding,
Enter 4 if you require quarterly compounding,
12 for monthly compounding,
365 for daily compounding,
and c for continuous compounding.
Cash flow annuity payment amount (PMT)
This refers to the cash payment you expect to receive each period.
Growth Rate (G)
This field relates to the growth rate of annuity payments each year in percentage terms.
Quantity of payments (Q) per period
Q refers to the frequency of payments in the investment. Enter 1 for annual payments, 4 for quarterly payments, 12 for monthly payments, and 365 for daily payments.
Timing of Annuity Payments (T)
You can either enter the end in this field if you are opting for ordinary annuity, with the amounts received at the end of the period. However, if you wish to receive the annuity payments at the beginning of the period, select beginning.
Future value (FV)
The future value of an asset is derived by calculating any present value sum plus interest and future annuity payments or other cash flows.
How a Future Value Calculator Works
While previously we have discussed the formula for calculating the future value of a lump sum deposit, there is a mathematical formula that covers more parameters and assets while calculating the future value. The future value (FV) of an investment is calculated considering a series of regular deposits on a decided interest rate (r) and the time period, usually in years (t).
The mathematical formula for future value calculation is:
A=PMT ((1+r/n)^nt-1)/(r/n))
This formula considers payment deposits to be made at the end of each time period, such as month or year.
Of these,
A = Future Value of the Investment
PMT = Payment Amount for Each Period
n= Compounding Frequency Per Period
t= Number of periods of investment
Conclusion
Future value calculation is among the most valuable tools available to investors. Even for individual investors venturing into the financial and equity markets for the first time, future value calculations can help them determine where to secure their funds.
However, it is essential to remember that there are a few minor disadvantages to using the future value calculator. It considers a constant growth rate and does not account for any dips in the company’s value. Before investing your time in future value calculations, remember that these values are estimates of things that may not happen. If an asset’s growth rate is expected to be 8% over a period of 5 years, but the company’s growth falls to 3% in the next year, the projections of future value will immediately be of no use. The calculator is also not helpful for those with irregular cash flows.
However, the future value can often prove an essential tool for comparing assets and making informed decisions.
