Time Value of Money

The formula below is to calculate the future value out of your current savings being compounded annually.

FV= PV (1 + i )^N

There are more complex formulas where your interest is compounded month, daily and so on. However, if you use this formula, it will just underestimate your future value leaving you with an amount a bit larger than expected.

FV is the future value of your money

PV is the present value of your money

i is the interest rate

N is the number of years it is invested

This formula also can be used in many different scenarios such as calculating how much would your future payments be worth today and so on.

In future postings, I would be including some excel worksheets that allows you to calculate it straight off and giving more indepth examples.

Until next time.

Compounding Interest

Compounding interest is generating interest from previous interest. It is how your money generates quicker than you have expected in the long run.

For example, when you keep your money in the bank at 7% per annum, for a $100 savings, after the first year you would have $107. In the next year, the $107 would be at the same 7% bringing it to $114.49 and not $114. This would give you an additional $0.49. This may look small but in bigger sums it makes a difference. Also it would get larger as it continues to be compounded.

This is the basics of compounding interest and could work in your favor when saving for a long term goal.