Future Value

Future value moves money forward in time. It answers questions such as: if I invest this amount today, how much will I have in ten years?

With compound growth, each year's return is added to the balance and then earns returns itself. If you invest 5,000 at 6% a year, after one year you have 5,300. After two years you have 5,618, because the second year's 6% is earned on 5,300. After ten years, the balance grows to about 8,954.

Three things drive future value: the amount invested, the rate of return and the length of time. Time is especially powerful. At the same 6%, 5,000 grows to about 16,000 after 20 years and about 28,700 after 30 years.

Future value is the mirror image of present value. Present value asks what a future sum is worth today; future value asks what today's sum will be worth later. Both rely on the same rate of return and the same compounding idea. Future values are only estimates when returns are uncertain, as they are with shares.