In my last post, I outlined the basic concept of time value of money. Now it is time to roll your sleeves up and solve some problems.  Calculating future value with a financial calculator or in a spreadsheet can be tricky.  I hope this helps:

Calculating FV (Future Value)

Time-Value-of-Money-Timeline Calculating Future Value: Your Journey to Becoming a Millionaire

If you remember from my time value of money post, future value is a number at a certain time in the future. Unlike the previous post, we will solve for the future value.

How much money will you have in 20 years?

This is the million dollar question in financial planning.

You can invest $500 per month and have 20 years until you plan to retire. If you earn a 10% annual return, how much money will you have to retire on in 20 years?

Let’s solve it together:

N (Number of Periods) is 20 years but this problem has monthly payments. So N is 240.

I/Y (Interest per Year) is 10% but we are using monthly payments so we need to divide by 12. So I/Y is 0.833%.

PMT (Payment) is $500 but we are putting money into an investment. So PMT (Payment) is -$500.

PV (Present Value) is not used in this problem.

Calculating Future Value with a financial calculator:

Here’s the summary of inputs for a financial calculator:
N: 240
I/Y: 0.833
PV: $0
PMT: -$500

After these inputs are in, hit CPT in the top left corner and then hit FV. Your answer is $379,684.42. You will have $379,684.42 in 20 years.

Computer Spreadsheet Solution:

Here is the formula to solve the problem in a spreadsheet program such as Apache OpenOffice:

=FV(.10/12,12*20,-500)

You come up with the same answer.  $379,684.42.  Ouch. I sure hope you don’t have many bills in your retirement. $379,684.42 will get you a nice room in your daughter’s basement. I would say son but we both know that’s not happening.

What happens if you save for 10 more years?

The beauty of time. Changing N (Number of Periods) to 30 years makes a big difference. Let’s take a look:

Calculating Future Value with a financial calculator:

Here’s the summary of inputs for a financial calculator:
N: 360
I/Y: 0.833
PV: $0
PMT: -$500

After these inputs are in, hit CPT in the top left corner and then hit FV. Your answer is $1,130,243.95. You will have $1,130,243.95 in 30 years.

Computer Spreadsheet Solution:

Here is the formula to solve the problem in a spreadsheet such as Apache OpenOffice:
=FV(.10/12, 12*30, -500)

Future-Value-Graph Calculating Future Value: Your Journey to Becoming a Millionaire

Much better. How does it feel to be a millionaire? Saving an extra 10 years makes a huge difference. You only invested an extra $60,000 in 10 years but you accumulated an extra $750,559.53 in wealth. Nice!

Are you having any trouble calculating future value?

In my next post, we’ll solve for PV (Present Value).

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