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The present value is the current value of a future sum of money. It is a handy tool to see how your investment will progress over the years. Moreover, you can use it to see how inflation reduces your purchasing power over the years. The concept of future value illustrates the time value of money. Interestingly, this also applies to the entire process of borrowing money. Borrowing some amount today and returning the same amount later comes at a cost for the lender. It also goes to show the reinvestment capabilities of money over the long run
Check out our ROI calculator to see how your investment will pay off in the long term.
How To Calculate Present Value Of Future Money
Calculating the present value needs only three values. Firstly, you need to know the future value of your money. Secondly, you need to know how long into the future your plans extend. Lastly, it would be best if you had at least a ballpark figure of the interest rate. It is important to note that we assume the interest to be constant over the period.
Doing the actual math to find out the present value is rather simple. First, add 1 to the interest rate and raise that value to the power of the duration. Then divide the future value with the value you just found to get the present value of future money.
Confused? Well, here’s an example:
Let’s assume that Alice wants to know how much to invest today, to get a total return of $1000 in ten years. Additionally, let the interest rate be at 5% per annum. The first step to calculating the present value involves computing (1+(5/100))10. This step nets a value of 1.6289. Lastly, divide $1000 by 1.6289 to give you a present value of $613.91.
Here is how inflation can cause your money to devalue down the line. If you take the previous figures itself, you can see that the $613.91 inflates up to $1000 in 10 years. An intuitive way to understand this is through the concept of purchasing power. Whatever you can get for $613.91 today will cost you $1000 after ten years.
Are you still confused? Fear not, as all you need to do is plug in the values as desired, and hit “Calculate!”. Let us take care of the math while you worry about your business.
To put it simply, any amount of money you get today is worth more than the same amount at a later point in time. In essence, money not spent today will end up losing value over the years. This very statement alone serves as a reason to invest your money in the future.
It is hugely beneficial to invest sooner rather than later. As you can see, compound interest weaves its magic. Hence, upon finding the right portfolio, it is always advisable to invest immediately. Furthermore, inflation will end up reducing your purchasing power down the line.
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