How to Calculate the Present Value of a Ongoing Monthly Payment
If you are making monthly payments for auto loans, school loans, a mortgage or credit card debt, you may be interested in knowing the present value of all those payments. The present value of the monthly payments represents the amount you would have to pay today to completely satisfy the liability. Basic economic theory states that a dollar today is worth more than a dollar tomorrow, due to inflation. Therefore, if you are able pay off your debt today and invest your monthly payments instead of paying down debt, you will increase your net worth.
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Things You'll Need
- Monthly payment amount
- Interest rate
- Number of payments being made
- Financial calculator
Instructions
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1
Calculate the present value of the monthly payments on a financial calculator. You will use the time value of money function keys. To calculate the present value of your monthly payments, program the following into your calculator: number of monthly payments = N; interest rate per month = I; current monthly payment = PMT. Press the "Enter" or "Calculate" button, then the "PV" button to compute the present value of the monthly payments. It's important that you enter the monthly interest rate, not the annual interest rate, which is often the rate stated on loan documents. To calculate the monthly interest rate, divide the annual rate by 12.
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2
Use a present value calculator available online. The process for determining the present value is similar to that in Step 1. Remember to enter the monthly interest rate, and when entering the payments, enter them as negative numbers. If an online calculator asks whether the monthly payments are at the beginning or the end of the period, choose the option closest to the time of month you make the payment.
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3
Create an Excel spreadsheet that will calculate the present value of your monthly payments. Insert the function for "PV" (present value). Enter the values for the Rate (the monthly interest rate); Nper (the number of periods); and PMT (the amount of your monthly payment, entered as a negative number). The result will be the present value of your monthly payments.
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Tips & Warnings
Enter the total monthly payment when calculating present value. The total monthly payment includes both principal and interest.
These calculations are for monthly payments with constant interest rates, not fluctuating interest rates.
