Who doesn’t love money, when it comes with not much of hassle? But does it ever come without any hassle, certainly No.
To earn money, we put our self to work, but to earn on money; we need to put money to work. Putting money to work, doesn’t mean it will go to office work and earn, but it is we, the holder of the money, and have to put the money into some market or financial asset, who will ultimately pay us, for giving our money when they required it.
It is like the other person or institution, is paying us for using our asset. So this way we put our money to work.
While we put our hard earn money for the purpose of investment, we only look for one thing i.e rate of interest. However, only rate of interest isn’t enough. We also need to check, what is the future value of the investment we make today will be worth few years after. Will the future amount, we will receive will be able to buy at least what we can do with the amount invested today? If that’s not possible, then the investment is not worth.
But, Why? Here comes the other character of the story, Inflation. If your investment can’t beat the inflation rate, then the investment is definitely worthless.
So, future value is the figure, which your investment shall match after specified period of time. Formally, Future value is the value of current asset, at an assumed growth rate, on a specific date in future.
Future value helps an investor to estimate or say predict, the amount of profit one’s investment can generate with varying degree of accuracy by different investment. Sometimes calculating Future value can become tedious depending on the type of asset, as assuming the growth of interest rate is difficult. However, calculating FV for amount dumped in saving a/c is easy reason being already specified rate of return.
Now, let’s understand the computation of Future Value. Computation of FV includes two-phase, 1st being the payment phase, duration, when you put money for the purpose of investment. Second being the idle phase, when you leave your investment to grow.
Let’s take an example:
Mr. A, a stock market advisor has decided to invest Rs1000, monthly for next 10 year, at rate of 12%, for the payment phase, then his investment shall mature in 20 years, i.e, 10 years after completion of payment phase. So, lets’ first calculate the corpus at the end of 10years of payment phase:
N= no. of payments
Amount accumulated at the end of payment phase taking 12% annually is 232339, approximately.
Now let’s see, how much will it grow to at the end of complete 20 years, i.e, more 10 years added after the payment phase. Formulae:
Here, the A=Rs232339
FV works out to be Rs721609.9
So, if your investment gives you at least Rs721609.9, with only 10% interest, then only go for the investment. Otherwise, look for some other investment options.