Future Value (FV)

What Is Future Value?

Future value (FV) is an estimate of what a sum of money will grow to by a set date, assuming it earns a specified rate of return, or interest rate, over a given number of periods. It answers a simple question: if money is set aside today and left to grow, how much will it be worth later? Future value rests on the time value of money, the principle that a dollar available today is worth more than the same dollar received later, because today's dollar can be invested to earn a return.

How Future Value Works

Future value depends on three inputs: the starting amount, often called the present value (PV); the rate of return per period (r); and the number of periods (n). Interest earned in one period is added to the balance, and that larger balance then earns interest in later periods. This process is known as compound interest. For a single lump sum, the calculation is:

FV = PV × (1 + r)^n

Because growth compounds, the result rises faster the longer money stays invested. This is why small differences in rate or time can produce large differences in outcome.

Example

Suppose $1,000 earns 5% a year, compounded annually, for three years. Each year the balance is multiplied by 1.05:

• Year 1: $1,000 × 1.05 = $1,050.00
• Year 2: $1,050 × 1.05 = $1,102.50
• Year 3: $1,102.50 × 1.05 = $1,157.63

The future value after three years is $1,157.63. The $157.63 gained is interest earned on both the original amount and the interest added in earlier years.

Why It Matters to Investors

Future value helps investors compare options that pay out at different times or rates. It is the reverse of present value, which works backward from a future amount to today's worth. It can also be applied to a series of regular payments, known as an annuity, using a different formula. Projections are only as reliable as their assumptions. Actual returns vary and can be negative, and a basic future value calculation ignores inflation, which reduces what future money can buy.