How To Calculate The Future Worth Of Your Present Money (Decide If It’s Worth To Invest)

The decision to invest is indeed not that simple, it’s way too complicated. A person might think that $100 would always be $100 but that’s absolutely not the case. Notice that the word “absolute“ has been used which clearly demonstrates the fact that $100 right now would never be equal to $100 in the future, near future or even past. Although both have 100 printed upon them, wondering what’s the case?

It’s something called “future worth of the money“ and is indeed a fine indicator of investment opportunity, we will be exploring it deeply but first there are few questions which need answer or else the matter will get complicated.

You might have heard “ordinary people“ talking about how expensive things are becoming. It’s totally fine to look at things that way, to witness house rent going up and up, to witness grocery items getting more expensive; it’s all good and as long as you’re equipped with the same eye, you’ll see the things exactly like that. But that’s not the case.

What’s happening right there is the fact that the worth of your money is going down day by day and the precious $100 you always had in your drawer is now worth only $80, in other words the buying or trading power of the $100 is now transferred to the $120. Although it sounds a bit confusing but if you see some of the economy experts like Robert Kiyosaki who are constantly getting more and more debt and making insane amounts of profit, things will start to make more sense. See Robert’s lesson on Financial Literacy.

One might ask for the secret sauce behind this ever changing “worth“ industry and that’s a legitimate question. The answer to which is very simple. To exactly come up with the future amount, there are some of the formulas developed by the economic experts. The formula is shared below and the necessary guideline to use them are also equipped with them.

Academic qualifications are important and so is financial education. They’re both important and schools are forgetting one of them. – Robert Kiyosaki

Jump straight to the formula itself? Well here it is then.

F = P (1+i )^n

Here’s what the terminologies of the formula mean;

F = Future worth of your present money. This is basically the entity which you intend to find.

P = The present amount of money you have right now. In our previous example where $100 became $120, the present money was $100 and to deploy it in the formula, it’s deployed as  P.

i = Stands for inflation. Inflation is the percentage of the prices going high, a commodity disturbance indeed. Inflation value varies from country to country and you can find the inflation rate of your country. It’s worthwhile to note that inflation value is in percentage so let’s say if a country A has inflation rate of 5% then it is written as 0.05. You get the point basically you need to divide the percentage by 100 to get the formula working right.

N = It is the time duration. If you wish to calculate the future worth of your money after one year, you put it 1. If you wish to calculate the future worth of your present money after 20 years, then you need to put n as 20.

Precaution – Although it’s pretty easy to calculate via this formula but the issue which many people encounter is the fact that values need to be consistent. For example when you find the inflation rate, most likely it will be in years. Let’s say 5% inflation per year. Now the equation is going in years perspective. The value of “n” would automatically be transferred to years. Now n 2 at n’s place would indicate a duration of two years.

To come up with monthly variation, simply divide the value of inflation by 12 and add it in the formula. Now the value of n would correspond to months. N=4 would now mean 4 months instead of 4 years as the inflation rate divided by 12 shifts the whole equation to monthly predictive manner.

The calculation helps to decide low investment business options and develops a sense of direction for entrepreneurs to come up with a calculated risk instead of chasing a business goal with no actual merit.

The concept of calculating the future worth of your present money goes a very long way, it’s just how you see this concept. For instance, there are people who take millions worth of loan from bank and they have this calculation in mind that when they have to return it will be worth less than the actual amount and they technically are making profit on just taking the loan. A sound ability to predict future yields unlimited amount of opportunities.

When I went through all of this in my economics class, my mid was full of questions. Out of all the questions, the most prominent one was “How will it help me to invest in businesses?“, luckily I got the answers for it after some brainstorming sessions and I’m willing to share it with you.

So basically how calculating the future worth of your present money helps in investing

• Once you are well aware of the inflation rate of your economy, you can decide whether it’s worthwhile to take a loan for business start-up or not. For instance consider you take a loan for 1 million and you have to return 1.2 million after two years. Let’s say the inflation rate was more than 10% so basically what happened there is that the present 1 million is worth 1.4 million in the future. Now brainstorm it real quick and you’ll see the opportunity. Your money is worth 1.4 million and you have to return 1.2 million, you make a profit of 0.2 million just with one simple calculation. Isn’t it awesome?
• It helps you determine the MARR percentage. If you are not aware of MARR (Minimum Acceptable Rate of Return), it is the percentage which a business person is willing to receive as a profit. For example if I operate a construction company, I’ll say I’ll only accept projects that give me profit of 6% of the total project amount. This is MARR for me. Similarly knowing the future worth can help business owners determine separate MARR for them as it varies heavily with the personal values and business structures.
• With proper future worth knowledge, you are well aware of whether to invest in the start-up or not. Angel investors are blessing and if you are an angel investor then this phenomenon is really important for you because it can help the prosperity level of a start-up and give a real time insight on the true profit which is made.
• Being well aware with the worth of one’s own money helps make decision which would otherwise wouldn’t be possible. If a person finds out that his $100 is going to be $80 the very next year then they would have no choice but to invest in some venture to increase it to $120. This way a forced cash flow is introduced in the society and as we all know, the more cash flow is introduced into the society, the better the society becomes.

The list is basically infinite, these are only the most common ones I could think about now and if you let your brain figure out the possibilities for you, then you’ll find out that there are millions of things that could be done. The one who knows a thing or two about the future is always leap ahead of others no matter the competition.

As for those who wish to dig deep into the matter and intend to come up with the more precise prediction I would like to highlight some more basic concepts like this which could help the interested one’s conduct more research.

• Economic Equivalence (EE)is the name given to a number of equations and the relations through which we can calculate the future worth of the present money or the present worth of some future money. The annual inflation annuities and much more. It’s really difficult to cover the economic equivalence here on this topic so I highly suggest to separately study it.
• Simple and Compound Interest are the two types of interest and are very important if you are lending money with the hope of making profit, make sure you’re well aware of the fact that the amount you lend ends up increasing and not decreasing and for that to happen a sound knowledge of simple and compound interest rate is necessary.
• Inflation and Taxes are totally regulated by the government bodies and the knowledge of both these phenomenon is quite essential as both of them play a very vital role. The stats of inflation and taxes can be found by any local lawyer or over the internet off course and would help to further clarify the predictions made with the formulas pointed out above.

We hope the topic is well clear now and any related query is welcome in the comment section below.

Resources –

Fundamentals of Engineering Economics By Chan S. Park {Book}

Rich Dad Poor Dad By Robert T Kiyosaki {Book}