Let’s think like finance gurus.
Most of our clients are either Doctors, Lawyers, Engineers or Entrepreneurs; thus, they request the help and support of a financial and investment advisors in order to assist in their financial planning and investment strategies. Not only do we help our clients achieve their financial goals, more so I here at Trust MD we educate our clients to help them better understand the complex world of finances.
Today’s topic? How do we calculate the future value of our savings using the Future Value formula on a financial calculator?
The future value formula helps us calculate the future value of our investments or savings given several factors such as:
- How much do I have saved so far? Present Value.
- How much will I save or invest per period?
- At what rate will my investments grow in value or what will my interest rate be on my savings?
- How many years or months will I be saving or investing?
If I know much money I have saved today, how much money will I be saving each year, at what interest rate will I be getting paid for saving, and how many years will I be investing, I should be able to calculate how much money will I have at the end. Why is this important? This allows us to do a better plan for our financial future and make adjustments along the way in order to meet our goals and needs.
Now, let’s do an example.
Joe, a 35-year-old Doctor wants to open his first IRA account this year with a contribution of $5,000 at an 2.5% interest rate. He will be contributing $5,000 each year for the next 20 years. How much money will Doctor Joe have at age 55, 20 years from now?
Let’s take look at the future value formula:
FV = PV x (1 + r) n
FV = Future Value = ?
PV = Present Value = $0.00 since this will be Joe’s first IRA account.
PMT = Payment Amounts = $5,000 each year
r = rate of return = 2.5% annual interest rate compounded annually.
n = number of periods (Months or Years) = 20 years.
Using the Future Value formula, we can calculate that Joe will deposit $5,000.00 today (present value) at an annual interest of 2.5% (rate of return), for a period of 20 years ( number of periods). Furthermore, Joe will deposit an additional $5,000.00 each year for the next 20 years.
At the end of the 20 year period, Joe has invested $120,000.00 inside his IRA account and will have a current investment balance of $127,723.29 for a $7,723.29 gain achieved by the 2.5% annual interest compounded annually.
Now, what happens when we want to reach the threshold amount of $1,000,000 saved over the next 20 years, having a return of investment of 5% with cero money saved so far today?
How much money will we have to save each year to reach $1,000,000.00?
We will figure this out on our next Newsletter.
