Future Value
Future value (FV) is the amount that a sum invested today will grow to by a later date, given an assumed rate of return. It captures the effect of compounding: each period's earnings are added to the principal and themselves earn returns. Future value answers the question, "If I invest this money now, how much will it be worth then?"
Worked example
You invest $1,000 today at an annual return of 5% for 3 years. FV = 1,000 × (1 + 0.05)³ = 1,000 × 1.157625 = $1,157.63. The extra $157.63 above the original $1,000 is the compounded return.
Why it matters
Future value is the core tool for retirement and savings planning, showing how today's contributions can grow over decades through compounding. The most common pitfall is assuming an unrealistically high or steady rate of return: real returns vary year to year, and a single optimistic rate can dramatically overstate the projected outcome.
Frequently asked questions
How is future value different from present value?
Future value grows a present amount forward in time using a rate of return, while present value discounts a future amount back to today. One compounds, the other discounts, but both use the same time-value-of-money relationship.
Does compounding more frequently increase future value?
Yes. The more often interest is compounded — monthly versus annually, for example — the higher the future value, because earnings start generating their own earnings sooner.
Related terms: Present Value, Compound Interest