1. What is the Future Value Formula?

The Future Value formula calculates how much an investment made today will grow to at a specific future date, accounting for compound interest. It's essential for financial planning and understanding the time value of money.

2. How Does the Calculator Work?

The calculator uses the compound interest formula:

Where:

• \( FV \) — Future value of the investment
• \( P \) — Principal investment amount
• \( r \) — Annual interest rate (in decimal form)
• \( n \) — Number of compounding periods per year
• \( t \) — Time in years

Explanation: The formula accounts for how interest compounds over time, with more frequent compounding resulting in higher returns.

3. Importance of Future Value Calculation

Details: Understanding future value helps in making informed financial decisions, setting savings goals, and comparing different investment options with varying compounding frequencies.

4. Using the Calculator

Tips: Enter principal amount in dollars, annual interest rate as a decimal (e.g., 0.05 for 5%), number of compounding periods per year, and time in years. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between simple and compound interest?
A: Simple interest is calculated only on the principal amount, while compound interest is calculated on both the principal and accumulated interest, leading to exponential growth.

Q2: How does compounding frequency affect returns?
A: More frequent compounding (e.g., monthly vs. annually) results in higher returns because interest is calculated and added to the principal more often.

Q3: What is a typical compounding frequency for savings accounts?
A: Most savings accounts compound interest daily or monthly, though this varies by financial institution.

Q4: Can this formula be used for other investments?
A: Yes, this formula applies to any investment with fixed interest and regular compounding, including certificates of deposit and bonds.

Q5: How does inflation affect future value calculations?
A: Future value calculations show nominal returns. To understand real purchasing power, you should adjust for expected inflation by subtracting the inflation rate from the interest rate.