Do you know that a future value calculator is different from a future value calculator annuity? An annuity is a regular flow as opposed to a one-time investment. Hence when there are regular flows where you must calculate the future value, you need to use the future value calculator annuity. This is a subset of the future value calculator.
We will first look at the concept of future value and why assets and investments have a future value? Then we will look at the applications of future value calculator India and how the future value calculator India can be used as a veritable tool of making scientific estimates of the future value of investments. But, first some basics.
To constrict the explanation, the future value concept helps individuals to make a reasonable estimate of what their savings and investments would be worth at the end of a few years. A future value calculator online which is available on various websites helps to figure out if the value of their savings would be adequate to meet their liabilities arising after a few years. From an actional decision point of view, this future value calculator can help you determine the corrective action to be taken in the form of increasing your savings, extending your tenure or even taking on more risk to earn more returns.
A future value calculator India can be practically applied to all types of investments and this includes bonds, equities, debentures, gold bonds etc. The concept of future is absolutely central to investing, saving, financial planning and financial advisory. In short, financial services cannot survive in the absence of the proper application of future value. A future value calculator makes it easy to forecast revenues you can earn and grow to meet various liabilities over time.
Let us first understand how to use the concept of future value before getting down to the use of the future value calculator.
Here is the formula to calculate the future value
Future value = P * (1+r)t
P = Initial value or the investment made
R = Rate of interest that is compounded annually
T = Duration in years for calculating future value
The above can be used for a basic lump sum future value calculator. This is normally, a very simple assumption. In reality, there are intermittent cash flows called annuities so you have to calculate the future value of such annuities. Normally, the future value calculator also imputes such annuities into the formula to give you the future value.
Future value calculator needs some basis inputs. That includes the initial investment, the annuity flows, the rate of increase in annuity flows, the rate of interest, the tenure, the frequency of compounding within a year etc. Once you input all this data, the future value calculator will give you the output as per your requirement.
There are some practical limitations in a future value calculator
The future value calculator has limitations to its utility because the future is unpredictable. For example, the future value calculator typically assumes that rates of return remain constant over time. But, as interest rates in the economy changes, the value will also change. So, your output could be flawed, although this is more of an approximation than a precise answer.
The future value calculator is an extremely useful tool to estimate the future value of a lump sum and of annuities.
Can I calculate Future value with monthly increments?
Broadly, there are two ways to calculate the future. The first is called the future value of a lump sum and the second is the future value of an annuity. In a lump sum, you just calculate the future value of a single principal amount. On the other hand, in annuities, you calculate the adjusted future value of a series of flows either annually, quarterly or even monthly.
This concept of future value of annuity can be expanded and used for monthly increments. For example, you can project cash flows with the increment factor and calculate the future value of interest annuities. Most future value calculators will allow you to define such annual or periodic increments in your cash flows and calculate your future value accordingly. That makes more sense, especially when you are calculating the future value of your SIP savings, which normally tend to increment over time. A proper future value calculator can get a precise picture with increments.
What is time value of money?
The future value calculator is based on the essential concept of time value. Money has time value because of two reasons. Every economy is subjected to inflation which means even if you do nothing, your money is worth less after 1 year. If inflation is 5% then you need Rs.105 at the end of 1 year to get the same value as Rs.100 today. That is the first aspect of time value.
The second aspect of time value is the opportunity cost. When you invest money in any asset, there is an opportunity you have foregone. That opportunity could be a very risk-free asset, which is the bare minimum you should be earning to justify the higher risk. This combination of inflation and opportunity cost create time value for money. That is the principle on which the future value calculator is based.
What are the uses of future value calculator?
The future value calculator has a number of distinct uses. Here are a few of them.
Can the future value be negative?
Future value of a positive investment can never be negative because in countries like India, the rate of interest is always positive. If you are not earning enough, it makes sense to keep money under your pillow than to invest or put it in a bank. By default, the future value of any investment or asset has to be positive.