Introduction
The future value is the amount that an invested sum of money today will become over time, at a certain interest rate. In this article, we will discuss the concept of future value and how to calculate it, as well as a practical example to illustrate ways to use future value in making financial decisions.
Concept of Future Value
The concept of future value is based on the idea that one dollar today is worth more than a dollar you will receive in the future. This is because you can invest the dollar you have today and it can grow over time at a rate of interest or returns. On the other hand, the dollar you will receive “tomorrow” cannot be invested today and thus lacks the potential for growth in value.
Practical Example of Future Value
To illustrate how to apply future value in making financial decisions, let’s take an example of a tax refund. If you are to receive a refund, it means you have paid more in taxes from your salary than you owed. In other words, you are overpaying to the tax authorities, who will later return this amount to you when you file your tax return.
How to Calculate the Future Value of an Investment
A future value calculator can be used to illustrate how to calculate the future value of an investment. There are several methods to calculate future value, including using an online calculator or financial calculator apps, or even spreadsheet programs. If you enjoy solving mathematical problems, you can use the following manual method:
Present Value vs. Future Value Concept
In addition to future value, we can also measure present value. Using present value, you can calculate the worth of something today if you know its value in the future. This process is also referred to as “discounting”, as the present value of any amount of money will be less than what it is worth in the future.
Using Present and Future Value
Present value and future value can be used in many financial calculations and decision-making processes. For example, you can calculate the present value and future value of some potential investments and compare them to make an upcoming investment decision.
Source: https://www.thebalancemoney.com/what-is-future-value-5093911
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