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It is no secret that the present value of money, if invested in compounding-interest tax-free instruments, can be worth more in the future. If you have $1,000, you can invest it now and earn more profit in ten years. If not invested for a lock-in periodof ten years,its value will be much lower.
Any money gains interest based on the duration of the investment. If you invest the $1,000, the future value will comprise of the principal investment plus interest earned over the period. But before investing, calculate the amount of money you’ll get as returns.
Factors Influencing the Future Value of Money
The value of money is dynamic as it changes depending on factors such as time, amount of money invested, and interest rates. External factors such as inflation may also affect the future value of money.
- Period of Investment: Refers to the time your investment takes to accumulate interests. The earlier you invest, the more time for your investment to compound and increase in value.
- Amount of Money Invested: When you invest a considerable sum of money, the returns will be higher in the future. However, you can invest whatever amount you have rather than not investing at all.
- Interest Rates: This is the rate of returns you will earn from your investment, usually expressed as a percentage. If you invest in a business with higher interest rates, you will make more money in return.
- Inflation Rate: The inflation rates can have a significant impact on the future value of money. If you earn $1,000 today, the same amount of money will have a lower value if the inflation rate increases in the future.
Determining the Future Value of Money
If you are determined to know the amount of money you’ll earn from an investment, use the compounding method to calculate the accumulated interests. With a favorable interest rate, your initial investment will accumulate significantly with time.
For instance, if you invest $1,000 and it grows at an interest rate of 10 percent annually, you will earn $1,210 when compounded after two years. To make a significant amount of profits out of your investment, you should invest a large sum of money.
What You Need to Know About the Time Value of Money
A dollar you receive today is of higher value than the dollar you will earn tomorrow because it has a higher purchasing power. Here are the hard truths about the value of money in the future.
1. Inflation will reduce the value of money in the next 100 years
As years pass by, the inflation rates are also increasing slowly but steadily. As a result, the prices of goods and services are also rising. Due to the increasing inflation, you can exchange $1,000 for more products today than in a hundred years to come.
Again, a particular amount of money today will be equivalent to a higher amount of money in the future.
2. Future investments will demand more starting capital than today
The earlier you start an investment, the better. The amount of money you will need to start a company in the next 100 years will be much more than what you would have to put in today. That’s possible because the value of money evolves with time.
Considering that the economy is changing, the future is unpredictable when it comes to investments. If you have enough money to start a company, invest today before the value of money goes up in the next few years. You will be earning and saving more funds to expand the business in the future.
The concept of the time value of money is a crucial financial aspect in every sector, including the stock market, the real estate industry, and foreign currency exchange. Factors like rates of inflation may affect not only the future value of money but also the currency exchange rate.
The currency value of a country with a low inflation rate appreciates with time. If you’re planning to exchange money in the future, you should consult financial experts who understand market trends, like those at Knightsbridge Foreign Exchange. With accurate predictions, you can determine how much you can expect to pay for exchanging money in the future.