Future values are simply how much an amount of money now will be worth in a certain number of years.  Think of it in this way – if you just buried the money now and dug it up in 10 years it would still be the same amount of money. However, if you put it in the bank and earned interest on the money, you would end up with more money in 10 years time.

For instance, what is the future value of $2000 in 10 years at 13% compounding yearly?

We can solve this by using the compound interest formula:

                                                 

                                              The future value is $6789.13

Present values are a bit more complicated, but if you can use the formula, they’re easy.  Say you want to have a certain amount of money in 10 years time.  The present value of that money is the amount of money you must invest now to get that desired amount in 10 years time.

The formula is:

                                           

A shorter version of this formula is:

                                                       

Present value question

I want to have $6000 in 10 years time.  The current compound yearly interest rate is 5% with yearly rests.  What is the present value of that $6000?

Solution

So if I want to have $6000 in 10 years time, I must invest $3683.48 now – this is the present value of $6000 in 10 years time.