Future Value

0.00 avg. rating (0% score) - 0 votes

Let’s take the mentioned earlier $10 note. If you put the note in 3-month deposit at a rate 10%* a month (this rate is only for the ease of illustration, in the real world such a high rate is impossible to find), 3 months from now you will have $13. This is called Future Value (FV) of the banknote. If instead, you will choose to keep the note for one month and only put it to 2-month deposit at 10% a month, 3 months from now you will have only $12 Future Value of the same banknote. 

Note: we use here the simple basis of interest, where interest is paid on the amount invested and not accumulated. We will explain compounding basis later.  

So, when you imagine yourself in 3 months, you will be richer by $1 if you put your banknote into savings earlier. The same note will make you $1 poorer as you wait for a month to invest it; therefore it lost value with this month. The Future Value of the same banknote at the same point of time in the future will be different based on when it started to earn interest. That’s a simple way to understand Time Value that money has.