What is Future Value (FV)?
Future Value (FV) is the value of a current asset at a future date based on an assumed rate of growth. It is a fundamental concept in finance that helps individuals and businesses understand how much their money will grow over time through compounding interest.
The Future Value Formula
The standard formula for Future Value including periodic deposits is:
FV = PV × (1 + r)n + PMT × [((1 + r)n - 1) / r] × (1 + r × type)
Where:
- PV: Present Value (starting amount)
- r: Interest rate per period
- n: Number of periods
- PMT: Periodic payment/deposit
- type: Timing of deposit (0 for end of period, 1 for beginning)
Why Future Value Matters
Knowing the future value of your savings helps you set realistic financial goals. Whether you're saving for retirement, a child's education, or a major purchase, calculating FV allows you to see if your current savings rate and investment strategy are sufficient to reach your targets.
The Power of Compounding
Compounding occurs when the interest earned on an investment is reinvested to earn even more interest in the next period. This "interest on interest" effect can lead to exponential growth over long periods, which is clearly visible in the Future Value results as the term increases.