What would you do if had the choice to receive $10,000 today or in two years? What would you do—take it now or wait two years? If you wait two years, would you have a better idea of what to do with the money? Would the $10,000 be worth more today or in two years?
Now that you understand money management tools, there is one more thing to learn that will help you make informed decisions about what to do with your money. It is called the time value of money. This concept maintains that a dollar today is worth more than a dollar in the future because of earning capacity. For example, if you deposit money into a savings account today, you will start earning interest and have more potential to grow the money over time.
How can you determine the time value of money? Click each row below to see the inputs required to calculate the time value of money.
This is your starting amount of money now.
This is your ending amount of money at a point in the future.
This is the number of years your money is invested.
This is the interest rate you earn on your money stated in a percentage.
Now that you know all the factors that need to be considered in determining the value of money, look at the equation that you will use to input all of the information.
\( FV = PV \times (1+ i)^n \)
If you were to invest that $10,000 at 10% interest for 1 year, what would be the future value in one year? Plug the values into the formula for future value.
| Start with the formula | \( FV = PV \times (1+ i)^n \) |
|---|---|
| Plug in the present value and number of years | \( FV = $10,000 \times (1+.10)^1 \) |
| Move the decimal point for the interest rate then add 1 | \( FV = $10,000 \times (1.10)^1 \) |
| Calculate to the n power | \( FV = $11,000 \) |
Now see if you can calculate the future value of Andre's investment on your own.
Andre decided to take the $10,000 and invest it for 5 years so that he could save for college. He was able to get 5% interest on his investment. What would be the future value of his money in 5 years?
$12,762.82
