What Is Future Value?

By Andrew Stotz | August 5, 2020

Definition of Future Value

It is the value of a current asset at a specific time in the future calculated based on an assumed growth rate.
The value of money includes time value; therefore, the future value is expected to be greater than the present value of the investment, considering the growth in investment.

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Factors such as inflation and the rate of return affect the value of money. In turn, that affects the future value of an asset.
The future value is calculated based on the interest earned on investments.

There are two different ways to calculate the future based on the different interests earned on an asset.
Simple Annual Interest Formula:

FV = I * [1 + (R * T)]

(Where FV = future value, I = initial investment, R = interest rate, and T = investment period.)

FV = I * (1 + R)^T

(Where FV = future value, I = initial investment, R = interest rate, and T = investment period.)

Investors use future value to estimate how much their investment today will be worth at a future date.
Estimating future value helps investors make critical investment decisions that check all their project requirements.
Investors can calculate the amount of profit that they will receive from the investments they make using future value.

The future value in practice is not a guaranteed measure, but rather an estimate.
There is an underlying assumption that a rate of return is earned on the funds over the time period. In practice, interest rates can fluctuate all the time.
Adjustments for inflation can also impact the rate of return on investment.
The calculation of future value is also not always accurate; it is possible to calculate an accurate future value of an asset with a steady interest rate.
Assets with fluctuating interest rates require a more complex future value calculation.
Let’s say you have $1,000 and would like to invest it at an interest rate of 5%. How much would you have in 10 years?
1,000 * (1 + 0.05) ^ 10 = $1,628.89
Therefore, you would have $1,628.89 in 10 years.

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