Future Value of Money: Definition, Examples and Calculations

The future value of money is the value of a certain amount of money at some point in the future. For example, you may be told to find the future value of $2,000 in the next 5 years. Based on what we have learned about the time value of money, an amount of $2,000 will be worth less than that after five years. Investors need to calculate the future value of their potential investments in order to make a good decision.

How to Calculate the Future Value of Money

The formula used to calculate the future value of money is:

FV = PV (1+i)n; where:

  • PV is the amount of money in the current period
  • i = assumed interest rate or discounting rate; and
  • n = number of years

Assumed interest rate x is the rate at which all future cash flows of an investment is discounted to get the present value. It is the rate of return that investors expect from their investments. A discount rate is also about how much money loses value annually, or how much money you would earn from investing your money. For example, if the discounting rate is 10%, it means that if you invest your money you will get returns of 10% every year. If you don’t invest the money, it will lose value at the rate of 10% per year.

For example, Mrs. Karanja has $3,000 today in her bank account where she earns an annual interest rate of 5.5%, what will be the future value of her savings after 15 years?

Using the formula of future value above, Mrs. Karanja’s money will be calculated as follows:

FV = $3,000 × (1+0.055)15 = $6,697.

Therefore, based on an annual interest rate of 5.5%, Mrs. Karanja’s money will be worth $6,697 in the next fifteen years. Is it worth making such an investment?

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