How to Calculate the Future Value of Savings with Compounding
Once you reach a certain point in your savings plan, you will want to figure out how much your savings will be worth in the future. A simple formula will allow you to make that calculation.
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Instructions
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Gather your data. You'll need to know the current value of your savings, your expected interest rate, and the number of years you plan to earn that interest on your savings. For example, you may expect a 2 percent return in a savings account, a 7 percent return on an investment account, or a 4 percent return on a CD. (These are examples of potential average returns, not definite returns for any investment) If you're taking inflation into account, you'll want to subtract the average rate of inflation (usually around 3 percent) from the interest rate.
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The formula to calculate the future value is Future Value (FV) equals Present Value (PV) times 1 plus your expected annual return to the power of the number of years the money will be earning that return (n). The formula is written FV = PV(1+i)^n
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Use the formula. As an example, let's say you put $10,000 in an investment earning an average rate of 7 percent. If you left the money there for 10 years, you would calculate the future value as FV = 10,000(1+.07)^10. This equals $19,671.51.
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Determine whether you need to account for compounding over time periods. If the annual rate is 5 percent compounded quarterly, you'll divide the interest rate by 4 and multiply the number of time periods by 4. So if you wanted to do the same equation presented above but compounded quarterly, the equation would be FV = 10,000(1+(.07/4))^(10*4) = 10,000(1+.0175)^40 = 20,015.97. To compound monthly, use 12 instead of 4.
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Tips & Warnings
You can use the rule of 72 to estimate the amount of time it will take to double your savings at a given interest rate. Simply divide the annual interest rate into 72. The result is the number of years it will take to double your principal at that rate. For example: At 9 percent, the principal should double in eight years (72/9=8).
