EXAMPLE 1 : SAVING FOR A VACATION
WEALTH
making a payment towards something ?
2 . I ( Interest Rate ) - What is the interest rate ?
3 . N ( Time ) - What is the timeframe ?
4 . PV ( Present Value ) - What is the present value of the payment ?
5 . FV ( Future Value ) - What is the future value of the payment ?
What can you use the time value of money for As you can see , there are plenty of uses for the time value of money , ranging from personal finance ( here are free calculators for you to download ), retirement planning , investment planning , and many more . For now , just do some examples and ensure you understand the basics of the time value of money .
EXAMPLE 1 : SAVING FOR A VACATION
Let ' s say you want to go on a dream vacation in two years , and you estimate that you will need R50 000 ( FV ) for the trip . You decide to start saving money monthly in a savings account with an annual interest rate of 9 %. The monthly payment ( PMT ) you can afford to set aside for savings is R3 000 . Now , you want to determine the future value ( FV ) of your savings in two years .
Inputs :
• PMT ( Payment ) = R3000 pm
• I ( Interest rate ) = 9 % ( expressed as a decimal , 0.09 )
• N ( Time ) = 2 years but use 24 months ( N needs to align with your payment . If monthly , use months here .)
• PV ( Present value ) = R0 ( assuming you haven ' t started saving yet )
To find FV ( Future Value ), you can use a financial calculator or a spreadsheet function . In this case , the future value of your savings after two years would be approximately R78 565.41 . It looks like you ' re going on holiday !
65 AUG / SEPT 2023 SA Real Estate Investor Magazine