How will the present value of a future sum help you
Knowledge of the time value of money is crucial in accurate estimating of your long term finances. We have all heard our senior family members claim at one point or another that when they were young [insert good or service] only cost a penny or a dime, when today it costs a whole lot more! The erosionary effect time has on money is identified as inflation and is linked to the cost of living (CPI – Consumer Price Index) determined by economic supply and demand for scarce resources. Inflation rates vary between time periods so we are interested in the long term rate. In Australia, the long term inflation rate has averaged 4.1% over the past 93 years and more recently 2.9% over the past 15 years. The effect of inflation can mean a monstrous difference between what you estimate and what you end up with in realty at a future point in time and neglecting to acknowledge this factor will be a detrimental error in your long term plan.
The definition says it all, it’s the value today of your estimated money at a given point in time in the future. Suppose you have projected that by the end of Year 10 (today is Year 0) will will have $10,000 in your bank account. Using a discount interest factor of 3% (an appropriate rate given it matches closely to the inflation rate) you could estimate the value of this $10,000 to be $7,440.94 as of today.
Present Value of a Future Sum Calculator
How this calculator works
By entering a future value, an interest rate (%) and the number of periods (years) the model will calculate the present value.
- Enter the future value – the sum you expect to have at a particular point of time in the future
- Enter the periods – a whole number represented by years
- Enter the interest rate – this is what you expect to be the average rate of return
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