How to Use the Time Value of Money Function (or TVM) on Financial Calculators For Simple Problems Involving Interest-Accruing Loans

Sometimes it feels like you're never making progress against your credit card debt. Just making the minimum payment due on your interest-accruing account usually pays nothing more than the interest for that billing cycle period! Do you want to quickly set goals for yourself to get a loan paid off within a certain amount of time? Are you playing with the idea of a personal loan and want to see what kind of payments you'd have to make to pay it off within a year? You can easily do this when you make use of the 'Time Value of Money' (or TVM function) on a financial calculator. This how-to guide uses the Texas Instruments BA II Plus: other calculator models will have a similar procedure. Master the 'Time Value of Money' and get inspired to pay off your loans in half the time (and save A LOT of money!).

Instructions

Difficulty: Moderate

Things You’ll Need:

• Texas Instruments BA II Plus or other Financial Calculator
• Your Most Recent Loan or Account Statements

1. Press the 2nd key and the FV key. 2nd shifts FV to the CLR TVM function. Always clear any previous TVM calculations. This is done by pressing the 2nd key (which acts as a 'shift' key, allowing you to access the values above the keys) and the FV key. Pressing 2nd with FV activates the CLR TVM key ("clear time value of money" - CLR TVM is written above the FV key). This step empties anything previously stored in the variables. You should get in the habit of doing this step whenever you start a new equation.
2. The 5 financial keys used in the TVM calculation are: PV, FV, I/Y, PMT and N. These 5 keys represent variables for the values 'present value' (PV), 'future value' (FV), 'interest rate' (I/Y), 'payment'(PMT) and 'number of cycles' (N). To complete basic financial calculations using the TVM formula, you will enter 4 of these 5 values and compute the 5th, or unknown, value. For example, if you want to know how much money you will still owe on your credit card at the end of the year (FV), you need to enter what you currently owe (PV), what your interest rate is (I/Y), how large each payment is (PMT), and how many payments you will be making (N). You then compute for the value of FV. In short, you tell the calculator what 4 of your values are in order to compute the 5th value.
3. PV - the "Present Value" key. Often, the present value of your loan will be entered in your equation. (You don't usually need to figure out how much you currently owe!) Type in the amount currently owed on your account and then hit the 'PV' or "Present Value" key. Your calculator screen will now display "PV = 500" or whatever other amount you entered.
4. FV - the "Future Value" key. This variable is what the value of your loan or account will be after whatever actions you are going to take. If you are looking to pay off your loan in full, set your 'future value' to 0. If you want to pay it down to $1000, set your 'future value' to 1000. If you want to know how much you will owe after a year if you change your payments to a different amount or your interest rate changes, leave the 'future value' key alone. You may either be computing what your future value will be or entering what you'd like your future value to be in different scenarios. To enter a future value, key in the numeric value, followed by the 'FV' key. When you enter 'FV', your calculator screen should read "FV = 0" or whatever amount your loan will have at the end of your scenario.
5. I/Y - the "Interest Rate per Year", better known as APR, key. This is another variable that you will be entering more than computing for. You will know your interest rate in most cases. The interest rate entered here should be your annual rate. The TVM function is programmed to spread this rate out over your payments throughout the year. Key in your yearly interest rate, then hit the "I/Y" key. Your calculator should display "I/Y = 15.99" or whatever annual interest rate you enter.
6. PMT - the "Payment" key. You can leave this variable empty if you're figuring out what payment you need to make to pay off your loan of $500 (PV = 500) in full (FV = 0) in one year (N = 12) at an annual interest rate of 12% (I/Y = 12). Enter different amounts to see how much you will owe if making different payments (i.e. - how much will you owe at the end of the year if you pay $200 a month?). Key in the amount of your payment and then hit the "PMT" key. Your calculator screen should display "PMT = 450" or whatever value you enter as your payment amount. Alternately, leave this key alone if you want to see how large your payments need to be to reach a certain goal.
7. N - the "Number of Periods" key. This variable can be left empty if you want to see how long it will take you to pay off a loan of $5,000 (PV = 5000) in full (FV = 0) with your current APR (I/Y = current APR) and monthly payments of $350 (PMT = 350). Alternately, key in the amount of the number of periods in your current situation and then hit the N key. Your calculator will display "N = 12" or however many payments you have specified.
8. Now is when you'll find your answer! Hit the CPT or "compute" key.
   Then, enter the key for whatever variable you're solving for (N, I/Y, PMT, FV or PV). Your answer will display on the screen! Remember, you can only compute a value that you have not already entered.
9. An easy summary of this procedure is to correctly enter amounts for 4 of the 5 available variables, and then solve for the fifth. Check out the resources below for additional information on the Time Value of Money and its use in your personal financial planning.

Tips & Warnings

• The '2nd' Key acts as a shift key on your calculator, allowing you to access more functions than you have keys for.
• Get in the habit of clearing your TVM variables (2nd key + FV to access CLR TVM key) as often as you clear your calculator with CE/C.
• Use an FV value of 0 if you're making calculations based on paying your account off in full.
• Your answer will be preceded by a negative (-) sign. Just ignore this. You can avoid this problem by entering cash inflows and outflows differently, but I just ignore the negative sign. Easy!
• With a little more work, you can use the same TVM worksheet to calculate annuities or even create amortization schedules.