What are the best tips for calculating future value?

Calculation of future value includes financial formulas and several variables, such as interest rates, time period and main or current value of the asset. When calculating the future value for normal annuity, the fourth variable is required, which is a regular payment to be accepted annually. Another perspective is the form of paid interest, as it can be either simple interest or compound interest. With the former, interest can only be obtained on the principal, while with the other interest can be obtained on both accumulated interest and principal.

You want to illustrate, assume that one puts a time deposit, which pays 5% per year for three years, stored the principal of $ 500 (USD). After the first year, the interest received on the principal of $ 25, leaving the balance of $ 525. This amount earns $ 26.25 at the end of the second year, leaving a balance of $ 551.25. Finally, at the end of the third year, the interest will be $ 27.56, which leaves the total balance of $ 578.81. Therefore, the total amount of interest is obtainedIn the period of three years 78.81 USD.

Continuation of the above example will be the interest earned annually in simple form for the same period for three years. This means that $ 25 will be earned every year from one year for the third year. This is because interest is earned only on the principal of $ 500 and no interest is earned in the second year on interest on the previous year of $ 25, which is also the same case for the third year. With simple interest, the total amount of $ 75 is earned, unlike $ 78.81, USD USD with compound interest.

The practice of calculating future value, as mentioned above, requires financial formulas. When paying compound interest rates, the formula used is the following: fv = pv x (1 + r)^n. Where FV is future value, PV is the current value or director, R is an interest rate and n is the number of time periods. Note that R is expressed in decimal places unless a financial calculator is used. For example, 5% would be expressedas 0.05.

Of course, the formula used in the simple interest rate method differs from when the interest is composed. It follows as such FV = [(PV) x (R) x (n)] + PV, where the letters indicate the same variables as above. For the above example, this formula would be used as follows: FV = [(500) x (0.05) x (3)] + 500, giving $ 575.

Further, when calculating the future value for a number of solid payments for the year, also called ordinary annuity, another variable is needed, which is the amount received or paid annually. An example is the hypothetical annuity, which pays $ 200 per year for three years with an interest rate of 5%. Its future value would be calculated using the following formula: FV = PMT [(1 + R)^n - 1] / R, where the annuity is paid in a year. Therefore, FV = 200 x [(1+0.05)^3 - 1] / 0.05, which gives 200 x [0.1576) / 0.05] then 200 x 3.1525, finally arrives at $ 630.50.

In addition, when calculating the future value, where the interest is composed more than once a year, a slightly different formula should be used. This is expressed as follows: fv = pv x [1 + (r / m)]^nm, where the letters represent the same variables as above with the addition of M, which indicates a time interest in the year. To illustrate, this will use the first example of the composition, as mentioned above. This time, however, the interest mentions a month instead of a year, which gives 12 compound periods per year for three years. FV = 500 x [1 + (0.05 / 12)]^36, which arrives at $ 580.73.