Present Value And Future Value Of Money

Do you study elementary finance? If so, you will definitely learnt about the computation of present value and future value of money.

Most of us forget all about the formula after we finish the finance module.

You are unlikely to pay attention to the computation of present value and future value of money when you shop for goods.

However, you should not dismiss the concept of the present value and future value of money in real life. Everyone feels the impact of the present value and future value of money.

If you have spoken to old people, you would hear them talking about those

days when a dollar could buy so many things. They loved to talk about those days when a hundred dollars could feed the family for a month.

The value of a hundred dollars is hardly the same as the value of a hundred dollars thirty years ago.

You know that the value of a hundred dollars today is more than the value of a hundred dollars ten years later. That is the concept of present value and future value of money.

How can you compute the present value and future value of money?

There are a few ways for you to do your computation.

You can use the fixed deposit interest rate as the guideline. If you put $1000 into a five years fixed deposit with compound interest of 6%, the $1000 becomes $1060 after one year. It will become $1123 after two years, $1191 after three years, $1262 after four years, and $1338 after five years.

$1000 is the present value of money. $1338 is the future value of money.

That is how

you use present value and future value to calculate your investment gain.

You can also use the concept of present value and future value of money to compute the erosion of money due to inflation.

If the annual inflation rate is 6%, that means the value of $1060 one year later is the same as $1000 now.

The problem is that the prices of goods do not increase at the same rate.

The price of real estate in many cities in China is doubly every few years. That is why many workers go on strike to ask for better salary.

If the increase in salary does not keep up with the inflation rate, they cannot maintain the same standard of living.

Most of us do not bother to compute the present value and future value of money. The only time when we are serious about the present value and future value of money is when we are taking up a mortgage. A $300,000 mortgage easily balloons to $400,000 by the time we pay off the mortgage.

Another time when we need to use the formula for the present value and future value of money is for buying insurance.

It does not matter whether you are buying whole life insurance or annuity, you know that the insurers use the computation of present value and future value of money to illustrate the returns. 



Article Written By scheng1

Last updated on 20-04-2016 41 0

Please login to comment on this post.
There are no comments yet.
Reuse And Recycle To Save Money
Tips For A Happier Life