Future Value Calculator
Future Value Calculator
Why does money have future value? Let us start with a small illustration. Let us say you put Rs.10,000 in a 10% coupon bond. At the end of the first year, that bond is worth Rs.11,000 with the interest accrued. Let me look at it differently. If I have to pay you Rs.11,000 after 1 year and decide that I am going to pay you the amount today, how much will I pay? Obviously, I will not pay Rs.11,000. Instead, I will pay you Rs.10,000 which you can invest in the bond for 1 year and realize your Rs.11,000 at the end of 1 year. In other words, Rs.11,000 is the future value of Rs.10,000 when the interest rate is 10%. Had the interest rate been 8%, then the future value of Rs.10,000 would have been Rs.10,800. I am sure you got the gist of future value.
Money has future value because it is never kept idle under the pillow. You will always put it to some productive use such that it earns some return. Time is an important dimension in the value of money. At the core of all investment projections and financial planning and portfolio management is the concept of future value. We will not only look at how to calculate future value but also how to use the future value calculator.
UNDERSTANDING THE CONCEPT OF FUTURE VALUE
Future value concept helps people make a reasonable estimate of what their savings and investments would be worth at the end of a certain number of years. While the future value can be calculated with a simple calculator, it becomes more complex to calculate future value when you are having regular investments like in the case of SIP. Here calculating future with a calculator can be quite cumbersome. The answer is to use either the Future Value tables or to use the excel spread sheet, which is a lot quicker and simpler.
The future value calculator India can be practically applied to all types of investments including bonds, equities, debentures, gold bonds etc. In the case of equities, returns are not fixed, but you can still get a reasonable estimate of equity returns to calculate the future value.
A future value calculator has an important role in financial planning. Here the first step is to use the future value calculator to determine how much your current savings would be worth. Once the future value is determined, that value is drawn down over the retirement.
PRACTICAL APPLICATIONS OF A FUTURE VALUE CALCULATOR?
The future value calculator has 6 distinct applications. Here are a few of them.
- The future value calculator allows you to simulate different levels of future value of a certain investment under different interest rate / yield scenarios.
- The future value calculator also allows you to simulate different levels of future value of a certain investment under different time periodscenarios.
- The future value calculator helps to simulate different levels of future value of a certain investment under different compounding scenarios; weekly, monthly, quarterly, semi-annually, annually etc.
- The future value calculator can help you to estimate how much the value of your investments will be at a future data vis-à-vis your goals.
- The interest rate also has an inflation component to it. So, when you use future value calculator, it helps you to estimate the inflation impact of your costs too.
- Lastly, the future value calculator gives a clear idea how much risk you have to take for a given level of required return. This can be tweaked based on your risk taking capacity.
HOW TO USE FUTURE VALUE CALCULATOR
Here is the formula to calculate the future value
Future value = P * (1+r)t
P = Initial value or the investment made
R = Rate of interest that is compounded annually
T = Duration in years for calculating future value
The above formula can be used for a basic lump sum future value calculator. This is normally, a very simple assumption. In reality, there are intermittent cash flows called annuities so you have to calculate the future value of such annuities. That can be done using the FVIFA (future value of interest factor annuity) tables. A better way is to use the excel spreadsheet, which has ingrained formulas for such calculations.
Future value calculator has certain limitations too
The future value calculator has limitationssince the future is unpredictable. For example, the future value calculator typically assumes rates of return to stay constant over time. But, interest rates in the economy change, the value will also change. The problem is that if the input is flawed, then even the output tends to be flawed. The future value calculator India is still an extremely useful tool to estimate future value of lump sum and annuities.
Is it possible to work out future value with monthly increments?
The concept of future value of annuity can be expanded and used for monthly increments. For example, you can project cash flows with the increment factor and calculate future value of interest annuities. Nowadays, future value calculator online gives you the facility to define such annual or periodic increments in your cash flows. That practically makes more sense because over time your income flows will not remain static. As your income increases, it makes sense to increase your savings also. Hence a future value interest factor annuity calculator with increment factor is the most practical.
Can you explains the concept of time value of money?
The future value calculator is based on the premise of time value. Why does money have time value? Firstly, every economy is subjected to inflation which means even if you do nothing, your money buys less after 1 year. For instance, if inflation is 4% then you need Rs.104 at the end of 1 year to buy the same value as Rs.100 today.
The second reason there is time value is opportunity cost. When you invest money in any asset, there is an opportunity you forego. Even when you keep the money under your pillow, the opportunity cost is not investing the money in a bank FD or in a debt fund.. This combination of inflation and opportunity cost creates time value for money. Future value is essentially based on the concept of time value of money.
Can the future value be negative?
Technically, if interest rates are negative, then future value can be negative. However, normally, the future value of a positive investment can never be negative in practical conditions. That is because in countries like India, the rate of interest is always positive. Any investment is better than let your money idle under your pillow. By default, the future value of any investment or asset has to be positive and cannot be negative.