Thursday, August 20, 2020 / by The Villages Home Search
Understanding the difference between the future value of your money versus the present value of your money can be tricky. (Using a future value retirement calculator can make it easy though.) Once you get your head around the concepts they are pretty simple, and you’ll see why understanding this way of thinking about cash is so important to your future financial security.
NOTE: If any of this feels confusing to you, good news! The NewRetirement Planner automatically takes care of all future value calculations for you, giving you a realistic picture of your future finances.
What Is Future Value? What Is Present Value?
Future Value: Future value is the value of your money in the future after all growth and depreciation factors (inflation) have been accounted for.
Present Value: Present value is the value of your money today. It is also the opportunity cost of that money: its value comes from what it can be used for today, in addition to its intrinsic value.
A Simple Example
If you have $10 today, $10 is the present value of your money. In the future, the value of that $10 could be very different. The future value of your $10 will be dependent on growth rates, time frames as well as inflation.
- If you simply kept your $10 in your pocket, then your $10 might only be worth $7 in the future (depending on the inflation rate and how many years your money sits there).
- However, if you invested your $10, then the future value of your $10 could be higher. To calculate the future value, you would add your net returns (your rate of return minus the inflation rate compounded over time) to the $10.
The key difference between present value and future value is what you can do with that money now versus what you can do with it in the future. (This is the opportunity cost.) Your money now can be invested in something that may give you more opportunities in the future, like your house, business or stock portfolio.
But you may need to spend that money now on necessities because you have to take care of the present to ensure the future. This is why calculating present value (immediate needs) versus future value (projected future needs) is essential to creating your best budget.
Future Value Formulas
There are various formulas that you can use to determine the future value of your money.
Future Value Using Simple Interest
FV = PV*(1+(r * t))
- t = number of years
- r = actual rate of return or interest (Your “actual rate of return” is your rate of return* minus the inflation rate**)
Future Value Using Compounded Annual Interest
FV = PV * (1 + r)^t
Present Value Formula
You might also need to calculate the present value of some future sum of money.
PV = FV/(1+r)^n
- r = rate of return
- n = number of periods
Future Value Calculator for Your Retirement
There are lots of simple widgets that can calculate the future value of some current amount of money (and vice versa).
However, it can be more complicated to think about all of the different levers that go into your retirement planning and how all of that will get valued into the future. And most importantly, will it be enough.
Future Value Calculator: How the NewRetirement Planner Handles Future and Present Values
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