Time Value of Money (TVM) Calculator
Future Value (FV)
Understanding the Time Value of Money (TVM)
The Time Value of Money (TVM) is a core financial principle stating that a sum of money is worth more now than the same sum will be at a future date due to its earnings potential. This fundamental concept is why interest is paid or earned: interest compensates the depositor or lender for the loss of their use of the money.
The TVM Components
- Present Value (PV): The current value of a future sum of money or stream of cash flows given a specified rate of return.
- Future Value (FV): The value of a current asset at a specified date in the future based on an assumed rate of growth.
- Number of Periods (N): The total number of compounding periods (usually years or months).
- Interest Rate (I/Y): The annual rate of return or discount rate applied to the calculations.
- Periodic Payment (PMT): A fixed amount paid or received every period (an annuity).
Example Calculation
If you invest $5,000 (PV) today at an annual interest rate of 6% (I/Y) compounded monthly for 5 years (N), and you make no additional payments (PMT = 0):
Your Future Value (FV) would be approximately $6,744.25. This is because your money earns interest, and that interest then earns more interest—a process known as compounding.
Why Use a TVM Calculator?
A TVM calculator helps individuals and financial professionals determine how much to save for retirement, how to value an investment, or how to calculate the true cost of a long-term purchase. By adjusting the variables, you can see how increasing your periodic payments or finding a slightly higher interest rate significantly impacts your wealth over time.