What it is
Future value shows how much an asset could be worth in the future based on a pre-determined rate of return.
It is a useful tool for investors and financial managers who want to calculate potential earnings from an investment, so they can see if it might grow their money as much as they need it to.
What it means for you
Before investing in any asset, you’ll probably wonder how much your money could grow. One way to find out is by calculating the future value.
For investments with a fixed interest rate, there are two formulas to determine future value. One is for simple interest and the other is for compound interest.
- Future value with simple interest
Future Value = Initial amount x (1 + (annual interest rate x years of investment))
Let’s say you want to put in P10,000 in an investment with a 5% simple annual interest. How much will it be worth in 5 years?
Future Value = P10,000 x (1 + (0.05 x 5))
Your money will be worth P12,500 after 5 years.
- Future value with compounding interest
Future Value = Initial amount x (1 + annual interest rate)years of investment
Using the same scenario above but with compounding interest, here’s the future value:
Future Value = P10,000 x (1 + 0.05)5
The answer is P12,762.82.
Keep in mind that these calculations have their limits. Risks like inflation and uncertain economic conditions can affect the future value of your investments.
The future value formula also assumes a constant rate of return, which may not apply to some investments.
To make informed decisions, there are other things to look at before you invest.
Aside from growth, future value formulas can also show potential losses when interest rates drop. It can help you plan ahead and revisit your portfolio as needed.
