Sunday, July 20, 2008

How to Calculate Future Value of Your Investments

I am always calculating how much money I could make from my investments in the future. This is an important process for me because I can fast-forward into the future to understand more about my investment plan whether it is working to reach my goal or not.

Calculating the future value is a simple task because the formula is very easy, short and you only need to press several buttons on the scientific calculator to do the trick.

It is simple to calculate future value of your current investment. In order to calculate future value, you will need a scientific calculator to do it. If you are using a normal calculator, then you will need a lot of time to calculate it. Anyway, you could use the "Future Value Calculator" I created using Microsoft Excel to do it.

The formula:

Future Value = Present Value*[(1+Interest)^No. of Years]

For example:

You are putting $1000.00 in your Fixed Deposit account for 3.5% interest per year.

You can calculate the value after 1 year like calculation below:

Future Value = Present Value[(1+Interest)^No. of Years]

Future Value after 1 year = $1000.00*[(1+3.5%)^1] = 1000*1.035 = $1035.00

If you want to calculate the value after 10 years, ou will need scientific calculator or use the "Future Value Calculator" to do it.

Future Value After 10 years = 1000*[(1+3.5%)]^10 = $1410.60

According to calculations above, you can see that 3.5% annually can only help your investment turn into $1410.60 after 10 years.

So, if there are better investment vehicles such as mutual funds, insurance and so on which offers you higher annual interest. Then, why not go for it? Of course, do not invest in those high return investment vehicles blindly because you need to consider the risk involve in the investments.

Mutual Funds with 10% Interest or Dividends Annually:

Let say you found a great fund called AAA fund, it gives 10% dividends annually. You plan to invest $1000.00 and wait for 10 years.

After 10 years = 1000*[(1+10%)^10] = $2593.74

Your money turns into $2593.74 after 10 years and that is a lot more faster if compared to 3.5% interest of fixed deposit. What if you have $10,000.00 to invest? What will be the value after 10 years or maybe after you retire? Please try to do some calculations yourself and you will get the answer.

Anyway, before you make any changes to your investment plan please plan it carefully and consult your investment manager to get more ideas and opinions.

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