Transparent method
The formula
Worked example
Example inputs
How to interpret the result
A dollar needed five years from now is worth less today than its face amount, because money available now can grow in the meantime. Present value answers exactly how much smaller that today-figure is, which is the number that actually matters when comparing a future obligation against what needs to be set aside for it right now.
Before you rely on it
What to check
Use a discount rate that reflects what the money could realistically earn elsewhere over that same period, not an arbitrary or overly optimistic rate.
The common error
Where people go wrong with present value calculator
Comparing a future dollar amount directly against a present dollar amount without discounting either one. The two aren't on the same footing until one gets converted into the other's terms.
Sensitivity evidence
How annual discount rate changes the present value needed
| Annual discount rate | Present value needed | Implied growth |
|---|---|---|
| 4.0% | $67,556 | $32,444 |
| 5.0% | $61,391 | $38,609 |
| 6.0%worked example | $55,839 | $44,161 |
| 7.0% | $50,835 | $49,165 |
| 8.0% | $46,319 | $53,681 |
Every input, tested
Which input moves the present value needed most
| Input | Tested from | To | Present value needed at each end | Swing |
|---|---|---|---|---|
| Years until needed | 7.0 years | 13.0 years | $66,506 to $46,884 | $19,622 (35%) |
| Future amount needed | $90,000 | $110,000 | $50,256 to $61,423 | $11,168 (20%) |
| Annual discount rate | 5.0% | 7.0% | $61,391 to $50,835 | $10,556 (19%) |
Two variables at once
Present value needed by annual discount rate and future amount needed
| Annual discount rate \ Future amount needed | $80,000 | $100,000 | $120,000 |
|---|---|---|---|
| 4.0% | $54,045 | $67,556 | $81,068 |
| 5.0% | $49,113 | $61,391 | $73,670 |
| 6.0% | $44,672 | $55,839 | $67,007 |
| 7.0% | $40,668 | $50,835 | $61,002 |
| 8.0% | $37,055 | $46,319 | $55,583 |
Step by step
The worked example, input by input
| Input | Value used |
|---|---|
| Future amount needed | $100,000 |
| Annual discount rate | 6.0% |
| Years until needed | 10.0 years |
| Present value needed | $55,839 |
| Implied growth | $44,161 |
Where the inputs come from
Future amount needed is the target, such as a tuition bill or a down payment, stated in the dollars of the date you will need it. The discount rate is the return you think the money can earn until then; a safer investment means a lower rate and a larger amount needed today. Years until needed is the wait. Be careful to choose a rate you would actually accept, since a high rate makes the requirement look small.
When the result stops applying
Present value is highly sensitive to the discount rate, especially over long periods. A one-point change over 20 years shifts the answer by roughly a sixth. The tool treats the target as a fixed nominal amount, so a goal that rises with inflation, such as college costs, needs an inflated target first. It also assumes a single lump-sum deposit.
What to compare it with
Use the future value calculator to check the answer forward, and the retirement goal calculator if the target is a retirement balance. For streams of payments, such as a pension or annuity, the annuity present value tools give the lump-sum equivalent. A net present value analysis extends the idea to projects with several cash flows.
People also ask
Frequently asked questions
What discount rate should I use?
Use the return you could reasonably earn on the safest investment that fits your timeline. For a goal in a few years, a savings or bond rate is safer than a stock-market assumption.
Why does a higher discount rate lower the present value?
A higher rate means the money grows faster, so less needs to be set aside today. That is why optimistic return assumptions make goals look easier than they are.
Is present value the same as the amount I should save each month?
No. It is a single lump sum today. If you save regularly instead, use the dollar-cost averaging or retirement goal calculators to find the monthly amount.