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Future Value Formula:
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The Future Value formula calculates how much an investment made today will grow to at a future date, taking into account compound interest. It's essential for understanding the potential growth of savings and investments over time.
The calculator uses the compound interest formula:
Where:
Explanation: The formula shows how money grows through compound interest, where interest is earned on both the initial principal and the accumulated interest from previous periods.
Details: Understanding future value helps in financial planning, retirement savings calculations, investment comparisons, and setting realistic financial goals. It demonstrates the power of compound interest over time.
Tips: Enter the principal amount in dollars, 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.
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 (daily vs. annually) results in higher returns due to interest being 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 can vary by financial institution and account type.
Q4: Can this formula be used for other investments?
A: Yes, the compound interest formula applies to various investments including certificates of deposit, bonds, and other fixed-income investments.
Q5: How accurate is this calculation for real-world scenarios?
A: This provides a mathematical estimate. Actual returns may vary due to changing interest rates, fees, taxes, and other factors not accounted for in the formula.