Investment Principles Everyone Should Know: No. 1 Time Value of Money

Labels: Basics, Calculations, Interest Rate, Personal Finance, Savings on Sunday, September 28, 2008 at September 28, 2008

This series will present fundamental principles everyone, especially the young, should know when it comes to personal finance.

The Time Value of Money

Money received and invested today is not the same value as that of money, with the same face value, received in the future.

Most would think that a hundred pesos received today is the same as that of a hundred pesos to be received next year. This assumption is wrong simply because of all the ways you can make the money grow during that gap. Just by putting the 100 pesos you received today in a savings account, you'll at least earn interest on it, thereby increasing its future value.

Here's a simple formula to determine the future value of funds compounded annually given a specific interest rate:

FV = Future Value
PV = Present Value
i = interest rate
n = number of years

Example:
If I have 69,500 pesos and I allow it to compound for 31 years at an annual interest of 9% per annum, the future value of my money would be

FV = 69,500 (1+.09)^31
FV = 1,005,092 pesos!

Have articles sent to your Email for FREE. Subscribe by Email