The investing journey carries a lot of benefits, but it also carries risks. So how do you know whether you’ll earn a profit or whether you’ll lose your hard-earned money?
One of the keys to success as an investor is to understand what your future returns are going to be. Keep reading to find out how you can calculate the future value of investment so that your decisions will bear fruit!
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What the Future Value of Investment Means
When you invest money (whether with accredited investors or financial institutions), you sacrifice the possibility of using those finances now in order to access that capital in the future. The present value and future value of your money, however, will be different. This is because you will have to take into account factors such as the amount of growth in the economy and inflation.
The future value (FV) of investment, therefore, refers to the value of your asset in the future, according to assumptions of economic factors.
How to Find the Future Value of Investment
There are different methods to estimating the future value of an investment. In general, they will compose of the following factors: the current value of assets, interest rates, and the period of time.
There are two calculations you can use to find out the future value of your assets, based on differences in the type of interest involved.
Simple Interest
An FV formula with a simple interest means that the interest rate attached to the investment will have a fixed rate throughout the period of time. To calculate the value of your investment, you will have to use the following equation:
FV = I(1+RT)
FV will be the future value of an investment, I is the amount you are investing now, R is the interest rate and T is the number of years.
If you invest $5,000 for five years and have a fixed annual interest rate of 3%, you will have FV = 5000(1+0.03*5), which is $5,750. This means that, after five years, your investment will be worth $750 more than its current value.
Compound Interest
A compound interest rate means that you will receive an interest based both on your initial investment and the interest you continue to earn overtime. If you start with $5,000 but have $5,250 in the following year, the interest rate will be calculated on the entire balance of $5,250.
The FV formula is:
FV = I(1+R)^T
If you invest $5,000 for five years as well and have a compound interest rate of 3%, you will have FV = 5000(1+0.03)^5. This will result in an FV of around $5,796.
Knowing About the Value of Your Investments
Before jumping into any investment opportunities, you’ll have to consider the potential future value of investment! There are different equations to help you answer this question, and they will depend on the type of interest rate being imposed.
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