Future value of an investment is the value of a present day investment at a future date.


Example: Lets assume you invest 1000 dollars in a savings account today and plan to withdraw it in 5 years time. The value of the current day investment (1000 dollars) in future (5 years time) is the Future Value Of your current investment.


So obviously the higher the future value the better the investment.


There are two factors which determine the future value of an investment:

• Rate of interest
• Number of compounding periods

‘Rate of interest’ is self explanatory. It is basically the rate at which your investment will be earning interest.

‘Number of compounding periods’: We know that compounding interest is when interest also earns interest rather than just the principal. The time interval between which interest is added to your investment is called number of compounding periods. So if you have an account which earns ‘an interest of 10% compounded quarterly’ it means that the interest is added to your account 4 times in a year.

So going back to the future value of investment - The formula for calculating future value is:

Future Value = present value (1+ i)^n

i= interest rate per compounding period. So if your account earns ‘an interest of 12% compounded quarterly’ means i = 3%.
n=number of compounding periods

Let’s work through an example - Assume you have invested 1000 dollars for 2 years in an account which earns 10% semi annually.
Future value = 1000 * (1+.05)^4
1000 * (1.2155) = $1215.51

So your 1000 dollar investment is $1215 at the end of 2 years.

One quick point to bear in mind is that the greater the compounding periods the more interest you earn and hence higher the future value of your investment.

Click here to read about present value of an investment

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