What is future value of money?What is future value of money?
According to the defintion of future value of money that I am familiar with, future value is how much a given sum of money will be worth to you at Time X in the future. To figure this out, you need to take a couple of things into account:
- You have to think about inflation. Of course, inflation will decrease the spending power of your money. If this is the only influence, your future value will be less than your curent value.
- You have to think about how much you can make that money grow between now and Time X. To do that, you have to try to project how much of a return you can make on that money by investing it.
So if you take the increase you might get by investing it and you subtract the effects of inflation, you end up with the future value of your money.
I think that much of the value of money is related to national tranquility and stability. In nations where there is frequent political instability and corruption, the value of money is less. When there is a perception that a government of a nation cannot substantiate the value of its currency because it cannot substantiate the value of itself. As mentioned, economic issues such as inflation also play into the determination of money's overall value. Yet, I think that economics merge into political expressions of reality. An unstable or uncertain political narrative of a nation can play a determinant role in the value of its currency. Some nations like Zimbabwe has such a difficult time establishing value in its currency because of this very issue.
You can pretty much guarantee, at least from the evidence of economic history, that the value of money goes down over time. It is based on a number of factors, of course, and some are variables that cannot be anticipated or controlled (revolution, economic collapse, war). But the longer a currency is in existence with the same economic system or government behind it, the less value it tends to have.
Inflation indicates that the value of money goes down with each year. In other words, what you can by for $1 now you won't be able to buy for $1 in ten years. The global market also has an effect on money, because exchange rates affect the value of the dollar. Sometimes prices go down as well, as the real estate market demonstrates.
Is there actually anyting backing tha American dollar these days? We are so far in debt and have been deficit spending for so long I am not sure how the American dollar can have much value now, let alone into the future.
Money employed in business or some similar activity earns some profit or interest over a period. This means that the time when a sum of money is available to a person or a business influences the benefit that can be derived from it. Thus, assuming that on average money earns an interest of 10% per year, then $100 received today, can fetch in next one year interest of $10. This means that $100 today are worth $110 after an year. Thus future value after one year of any sum today is 110% of the present value.
Money that is not spent is best invested in avenues that provide an increase in the initial sum. This gives rise to the term future value of money. For example if a bank offers a rate of interest of i on money deposited with it and we are calculating the future value after n years, it will be equal to the present value multiplied by (1+i)^n. Or F. V. = P. V. * (1+i)^n.
Future value of money is also used with reference to the decreasing purchasing power of money due to inflation. If the rate of inflation in a country is i for n years, an amount of money equal to A is worth more today than the same amount n years later as with an amount A after n years only products worth A/ (1+i)^n can be bought.