Future value

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Future Value is the amount that an investment made today will grow into at some point in the future. It answers the question: $100 invested today is equivalent to how much money X years into the future?

The future value is simply the principal plus any interest or return gained from an investment over time. To calculate future values, you take the present value of the money and compound it by an appropriate interest rate or rate of return. Future values are useful for knowing what an investment made today will grow to over time. Future value should not be confused with a futures contract.

Calculating Future Value

Although there are a number of different ways to calculate future value (depending on the type of compounding), future value calculations are relatively straightforward. Take the present value of the money, and compound it by the rate you expect to earn. The future value will differ depending on whether it is simple interest, compounding interest, continuously compounded, or other various returns. For example, suppose you have $100 today, and put it into a savings account that earns 10% interest, compounded annually. Assume interest rates do not change.

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The future value is simply the present value multiplied by a compounding factor, which in turn depends on what type of compounding you expect to earn. Conversely, the present value is simply the future value divided by the compound factor (in this case it would then be called the discount rate).

The future value of $100 in exactly one year will be: $100 * (1+0.10) = $110. If you do not touch the account for two years, the future value after two years will be $100 * (1+0.10) ^ 2 = $121. Another way of saying this is that $100 today is equivalent to $110 in one year, and equal to $121 in two years, assuming a constant 10% interest rate over the two years and annual compounding.

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