The future value of money is the amount that a specified amount of money in the present will be worth at a future date, given a certain interest rate. People can use the future value of money to figure out the full cost of loans, compare investments such as mutual funds, bonds and interest-bearing savings accounts, or estimate their retirement income needs.
Determine the present value of money. The present value can be the original amount of an investment or loan. For example, if a person puts $20,000 into a savings account that earns 5 percent interest per year, the present value is $20,000. It can also be the annual income you would need to retire now, if you are trying to figure out how much you will need when you do retire.
Add one to the interest rate or, in the case of retirement planning, add 1 to the presumed inflation rate.. In our example, 5 percent is expressed as .05 mathematically. Adding 1 to this number results in 1.05.
Raise the number calculated in Step 2 by the number of periods the investment will remain invested or the number of years of loan payments to determine the future value factor. In our example, if the person plans on keeping the money in an account for five years, then 1.05 ^ 5, which equals 1.276. Another way of saying this is to take 1.05 and multiply it by itself, then take the product and multiply it by 1.05, repeat the process five times.
To calculate retirement needs, use the number of years before you retire, then figure how many years you will live in retirement.
Multiply the original amount by the future value factor. In our example, $20,000 times 1.276, which equals a future value of $25,520.
Carter McBride started writing in 2007 with CMBA's IP section. He has written for Bureau of National Affairs, Inc and various websites. He received a CALI Award for The Actual Impact of MasterCard's Initial Public Offering in 2008. McBride is an attorney with a Juris Doctor from Case Western Reserve University and a Master of Science in accounting from the University of Connecticut.