Future Value

Future value (FV) is a financial metric that can helps investors project the future worth of their investments. Understanding FV allows you to improve and support your decision making. In this article, we will break down the concept of FV, its importance, and how to calculate it effectively.

What is Future Value?

Future Value refers to the projected value of asset(s) at a future date, assuming a specific growth rate and/or specific input of assets. This value is influenced by factors such as capital appreciation, reinvestment of earnings, and the time period considered.

FV is essential for:

• Investment decision-making: Helps you compare different investment opportunities.

• Retirement planning: You can estimate the future value of your investment portfolios.

Common pitfalls of using Future Value

When using future value to determine the best investment opportunity it is easy to focus too much on the highest value in the future. The highest return will result in the highest future value, but it will ignore the risks completely. It is very important to keep in mind your own strategy and your own expertise. Some opportunities can predict returns of 15% per year, but these type of returns are very unlikely over a course of 10 to 15 years.

We personally are pretty risk averse, so we aim on an average return of around 7-8%. For our real-estate investment we aim for a return of 5% in cash on cash, with a possible appreciation return in the future. For stocks we aim for around 8-10%, for crypto we currently aim for 10%+, but we know it will not keep this amount forever. Also we like to keep some cash on hand and we expect only around 2% on that.

Formula for Future Value

The most common method for calculating the Future Value of Equity is the compound interest formula:

Where:

• FVE = Future Value of Equity

• P = Present Value of Equity (initial investment or current equity value)

• r = Growth rate (expected annual return, expressed as a decimal)

• n = Number of years

Example Calculation

Let’s assume an investor has $50,000 in equity today, and they expect an annual growth rate of 7% over 10 years.

After 10 years, the investor’s equity would be worth approximately $98,350.

Methods we use to calculate the Future value

We calculate the average of two different formulas. We calculate the future value based on the formula above but we add our monthly expected contributions to our portfolio to this formula. This results in the following formula (excel style);

="Investment amount now" * (1+(0,07/12))^"Months left till goals"+ "Monthly extra investment" * ((1+(0,07/12))^ "Months left till goal" -1)/(0,07/12)

• Expected return of 7% in this example

• 12 is used because the amount of month in a year.

  
  

We also calculate the future value based on our average return of the last 6 months. This is to compare our current results with our original plan. The average of the two calculations is the amount you can see in the homepage of our site.

Conclusion

Understanding the Future Value is very useful for making informed investment decisions. By using simple or continuous compounding formulas, investors and businesses can forecast the potential growth of their assets. Factors such as market conditions, reinvestment strategies, and time horizons play a critical role in determining FVE.

By applying these principles, you can better plan your financial future and maximize returns on your investments.