How will the future value of a present sum help you
The concept of future expectation based on current parameters is one of the core requirements of finance and successful financial management. The concept is relatively easy to comprehend – you start with a sum of money today and through the power of compounding you end up with more in the future. There are many variables in determining the future value eg. interest rate, compounding frequency and type of annuity (periodic payments). By understanding this process you will have the necessary skills to calculate an estimated future value of a present sum with reasonable accuracy.
In the calculation of the future value, I have included a feature that you won’t find in other calculators, payment frequency. Typically you have an option to either include or exclude a periodic payment and if you include the payment it will occur at every payment interval. This is limited it you would only like to include the payment at every second or third interval. With my future value calculator you have the choice of when you would like to include or exclude this payment so you now have the option to include a payment at every second, third, fourth and nth.
Assume you have $10,000 in your bank account today and you decide to invest the money in a low cost managed fund. If we apply an interest factor of 10% compounded annually over a time horizon of 10 years by the end of the 10th year you could expect to amass $25,937.42. While this is a useful guide, it’s rough. The calculation doesn’t take into consideration investment costs or variations in compound frequency.
Future Value of a Present Sum Calculator
How this calculator works
By entering a present value (today’s value), an interest rate (%), the number of periods (years) and any payments the model will calculate the future value.
- Enter the present value – a value as of today
- Enter the interest rate – this is what you expect to be the average rate of return
- Enter the compound frequency – represents how often the interest is totalled and added to the principle amount. If unsure just assume simple compounding and enter 1.
- Enter the periods – a whole number represented by years
- Enter the payment amount – not essential to the model but, if you would like to add a periodic amount (annuity) to the present sum then enter it here. It’s assumed the figure will be added each period
- Enter the payment frequency – this is how often the payment will be made eg. if you would like to add a payment every second period enter 2 or every fifth period enter 5
- Enter the payment type – if the payment will be added at the beginning of the period input 1. The alternative, payment will be added at the end of the period, enter 0.
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