Future value

Before you rely on it

What to check

Restate the result in today's money before drawing comfort from it.

The common error

Where people go wrong with future value

Quoting a large nominal figure decades out. Three decades of ordinary inflation turns an impressive number into a modest one, and the plan built on the impressive version is short.

Worked through

Future value in plain numbers

You start with $5,000 and add $200 a month for 20 years, earning 6% a year compounded monthly; the starting deposit grows to about $16,551. The monthly deposits add up to $48,000 of contributions and grow to roughly $92,408. Together the balance is about $108,960. Of that, only $53,000 came out of your pocket. The remaining $55,960 is growth. Try 4% instead of 6% and the final figure falls to about $84,500, and at 8% it climbs to about $142,400; small changes in the rate move long-term results a lot, which is why estimates should be tested at a few rates.

Easily confused

Future value and its neighbours

Future value is not the same as a prediction, and it is not simply the sum of what you deposit; it is the modeled value of money at a future date under a stated rate and schedule. Present value runs the calculation in reverse, discounting future money back to today. Future value of an annuity handles regular payments. Nominal future value ignores inflation, while a real figure adjusts for it, and a result of $108,960 in twenty years will not buy what $108,960 buys today.

In real decisions

Where future value turns up

People use future value to set savings goals, to project retirement accounts and college funds and to compare deposit options; businesses use it to estimate the value of investments; advisors show clients what regular contributions can become. A calculator helps you work backward as well: ask how much to save monthly to reach a target. It is also useful for seeing the cost of delay, since each year of waiting removes years of compounding.

Know the edges

Where future value stops being reliable

The rate is an assumption, and real returns vary year to year, sometimes widely. Fees, taxes and inflation reduce what you end up with; the formula assumes deposits are made on schedule and the rate stays constant, and treat results as illustrations, and check them against conservative and optimistic cases. Do not assume the outcome is guaranteed, especially for market investments.

Quick answers

What people ask about future value

How do I include monthly deposits? Add the future value of the deposit stream to the growth of the starting balance. The deposit stream uses the annuity formula: payment times the growth factor minus one, divided by the periodic rate. A calculator handles both parts at once.

What rate should I assume? Use a conservative figure and test a range. Long-term stock returns have varied a great deal, and fees and taxes reduce what you keep. Showing three cases, low, middle and high, is more honest than one number.