Details of Future Value

Let's imagine that you win the lottery and you win £10,000. You are given two options. You either take the money today or you are given the money in 5 years. There are few reasons to accept the money in 5 years time over today, which is why most people would choose to take the money today.

Example A: With an annual interest rate of 5%, in 5 years your £10,000 could turn in to £12,782.82 compared to if you accepted the money in 5 years time, it would still be worth £10,000. When entering the world of investments, the future value of money and assets is an important concept. Anyone who makes regular investments into a specific instrument will always want to know its value after a specific period.

Example B: You choose to invest £10,000 into bonds for the next 10 years. On top of this you have chosen to invest an additional £1,000 each year for the next 10 years. If we assume that these bonds have an interest rate of 5%, after 10 years the future value of this investment will be £28,866.84. Future value is an important and useful thing to look into when purchasing or making investments.

Future Value Formula

Future Value (FV) = PV × (1 + r) n

Where:

FV = the Future Value,

PV = the Present Value,

r = the interest rate (as a decimal),

n = the number of periods

Calculation of Future Value

The values which are described below are very essential when calculating the future value of an investment.

Present Value: The present value is the value of the money you are investing at the current time.

Annual Interest Rate: This value can have a big impact on the future value of your investments. Having a higher annual interest means that there will be a higher future value.

Payment Amount: If you have chosen to make payments on a regular basis then this amount will help you know the value of these payments on a future date.

Number of Payments: This value is largely influenced but how often payments are made and how frequent they occur. If you make greater payments, you will find that you will have a great future value.

Payment Frequency: This value defines how often payments are made. Payments are usually either monthly, quarterly, 6 monthly, or annually. If you make payments more frequently then you will find that your future value is going to be higher.

You may also be interested in our Sinking Fund Calculator

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