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Tip of the day

Do you ever want to work out what the future value of your savings will be or how much you need to save in order to achieve a pre-defined sum? I often get asked questions such as these, ‘if I were to invest £20,000 today, how much will I get back in 5 years time?’ or ‘if I wanted to create a fund of £20,000 within 10 years, how much would I have to invest?’. Well there is a simple formula of which you can avail yourself that allows you to carry out this calculation for yourself.

Let’s address the future value first,  which may or may not elicit good/bad memories of school and algebra! A straightforward compound interest sum using an equation! Naturally, we need certain data to be able to effect the solution, namely the interest/growth rate, and the desired years.  In the first question above that is 5 and let’s apply an interest rate of 5% (in this market?? Fat chance!).
This is the formula then,

FV=PV(1 +i)^y

Where FV=future value, PV=present value,  1=1, i=interest rate and y=years given.
So, in our first example, let us replace the letters with numeric values.

FV=£20000(1+0.05^)5,  FV=£20000(1.05^)5, FV=£20000(1.27628), so FV=£25,525.60.

Notice how  I expressed the interest rate percentage as a decimal.
Similarly, the formula for the present value is the following:

PV=FV/(1+i)^y

And for our second example, you would just substitute the letters for numbers again and carry out the same procedure. This formula has many useful applications as I am sure you can imagine. Although take care in assuming what interest rate you use and unless it is a fixed variety, be aware this is a variable figure! Hope you find this useful.

**UPDATE UPDATE UPDATE**

Essentially, in addition to being a level 5 qualified professional financial planner with 25 years experience directly authorised with the FSA , I also am possessed of an advanced diploma in counselling as recognised and overseen by BACP. So as well, as the normal gamut of services one would expect from an IFA such as myself, i.e. estate planning, insurance, pensions and investment etc.., I also promote a mediation service for divorcing couples combining the counselling expertise with the financial knowledge. This can save a great deal of mony in legal fees as well as a more harmonious and less impersonal approach to an emotional event that can be very stressful, painful and delicate. If you would like an informal chat to understand the process, feel free to contact me., Please be aware that this mediation service is not an activity regulated by the Financial Services Authority.

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