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Future Value Formula:
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The Future Value (FV) formula calculates how much an investment made today will be worth at a future date, based on a specified interest rate and compounding period. It's a fundamental concept in finance for evaluating investment opportunities.
The calculator uses the Future Value formula:
Where:
Explanation: The formula calculates compound interest, where interest earned in each period is added to the principal and earns interest in subsequent periods.
Details: Understanding future value helps investors make informed decisions about savings, retirement planning, and comparing different investment opportunities. It demonstrates the power of compounding over time.
Tips: Enter the principal amount in dollars, interest rate as a decimal (e.g., 0.05 for 5%), and the number of compounding periods. All values must be positive numbers.
Q1: What's the difference between simple and compound interest?
A: Simple interest is calculated only on the principal amount, while compound interest is calculated on both the principal and accumulated interest from previous periods.
Q2: How often should interest be compounded?
A: More frequent compounding (daily vs. annually) results in higher returns. The formula assumes the interest rate matches the compounding period.
Q3: Can this formula be used for different compounding frequencies?
A: Yes, but you must adjust the rate and periods accordingly. For example, for monthly compounding of an annual rate, divide the rate by 12 and multiply periods by 12.
Q4: What if I make regular contributions to the investment?
A: This formula calculates future value for a single lump sum investment. For regular contributions, you would need to use the future value of an annuity formula.
Q5: How does inflation affect future value calculations?
A: The nominal future value doesn't account for inflation. To find the real future value, you would need to adjust for expected inflation by using a real interest rate.