Overview
Main Menu Name: Future
Determines the future value of regular deposits to a bank account, mutual fund, insurance annuity, or any other investment vehicle. It assumes all deposits are of the same amount and that the entire fund earns a consistent rate of return throughout the investment period.
In this article:
Background
The future value of an annuity is another way of asking, "How much money would I have after a given number of years if I invest a certain amount regularly?"
For instance, if you save $X a year and earn Y% for Z years, how much would you have? If the value of this regular savings program is less than your monetary goal, the shortfall can be computed and the "future" program can be used to find out how much extra must be invested each year.
Most calculations to figure the "future value of $1.00 per period" are based on the deposit being made at the end of each period. This is referred to as an ordinary annuity, or "annuity in arrears."
If an investment program is started in a given year, the first dollars are not actually invested until the end of that first period. For instance, if investments are made monthly and the starting date is January, the first actual deposit is made at the end of that month.
If payments are made at the beginning of the period (this is called an "annuity due") there will be a larger amount at the end of the period.
Getting Started
Essentially, calculating the future value of an annuity is calculating "how much money will accumulate if a specified amount is invested annually for a specified number of years." For example, if an individual saved $X a year and earned Y% for Z years, how much money accumulates? If the amount accumulated does not meet the individual's financial goal, this calculation can be used to calculate how much more must be invested each year.
Most calculations, which determine the "future value of $1.00 per period", assume that the deposit is made at the end of each period. This type of annuity is called an "annuity in arrears." When an investment calculation is started, the first deposit is not actually made until the end of the first period. For example, if monthly investments will be made and the fund's starting date is January, the first investment payment is deposited at the end of January. If the investment payments are made at the start of the period (an "annuity due"), the fund will contain a larger sum of money at the end of the period. This calculation determines results for both annuity in arrears and annuity due investments.
Entering Data
- Annual Payment Amount: Enter the amount that will be invested each year.
- Annual Interest Rate: Enter the assumed interest rate that the fund will earn during the investment period.
- Number of Years: Enter the number of years that money will be invested in the fund.
Results
This calculation determines the future value of a series of deposits to a bank account, mutual fund, insurance annuity, or any other type of investment. The calculation assumes that the interest rate specified at the Annual Interest Rate entry field and the annual deposit specified at the Annual Payment Amount entry field remain constant throughout the investment period. Results are displayed for investment payments made at the beginning of the year (Annuity Due) and for investment payments made at the end of the year (Annuity in Arrears).
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