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Excel’s FV function is a useful tool for financial planning. It predicts the future value of payments by accounting for interest on loans or the growth of savings over time. Let’s delve into the intricacies of the FV function and see its application in different scenarios.
What Does Future Value (FV) Mean?
The future value (FV) represents the worth of a sum of money at a specific point in the future, taking into account factors like interest rates and periodic contributions. At its core, the concept of FV revolves around the time value of money, which declares that a dollar today is worth more than a dollar in the future. This is primarily because of the potential earning capacity of money and inflation.
You can use the FV function for both loan and savings scenarios. When you take out a loan, the lender charges interest as the cost of borrowing. This interest accumulates over the duration of the loan. FV helps determine how much you will owe in total, including this accumulated interest.
As for savings, the power of compounding is one of their most significant aspects. You earn interest on both the initial principal and the accumulated interest over time, a concept known as compound interest. The FV function helps in capturing this compound growth.
The concept of FV is not just theoretical; it has tangible implications in the real world. For instance, due to the power of compounding, even a slight difference in interest rates can lead to significant differences in FV over long periods. you’re able to better observe this by trying out acompound interest calculator in Excel.
What Is the FV Function in Excel?
FV is one of the corefinancial functions in Excel. It calculates the future value of an investment or a loan based on constant payments and a constant interest rate. The syntax is as follows:
When calculating loan payments, ensure the rate, NPER, and PMT use the same time intervals. For example, if making monthly contributions, divide the annual interest rate by 12. You can alsouse the RATE function in Excelto calculate the interest rates for different scenarios.
Calculating the Future Value of a Loan With FV in Excel
In the context of loans, the future value represents the total amount owed at a future date, considering the principal (the initial borrowed amount), the interest accrued over time, and any additional fees or charges.
If you want to use the FV function for a loan, you will need to have the loan’s interest rate, the number of payments you have made at that point in the future (NPER), the payment made per period (PMT), and the amount of the loan (PV). FV calculates the future value, which, in this case, is the amount you owe to the lender.
Just got started with Excel’s financial functions? We recommend reading our guide onExcel’s NPER function, where we cover the core concepts related to these functions. Understanding these concepts will make working with these functions much easier.
If FV shows a positive value, it means that you still owe the lender, whereas zero implies that you have paid off your debt. If FV shows a negative value, it means that you have not only paid off your debt, but you have also lent some money and become a lender.
Let’s demonstrate this with the spreadsheet above. Imagine you’ve taken a loan of $15,000 (PV) at an annual interest rate of 5%, and you contribute $500 each month (PMT) to pay it off. You can use the FV function to see how much you’ll owe the bank 20 months (NPER) after you’ve taken the loan. Here’s how:
In this case, the formula shows that after you make 20 monthly payments, you’ll still owe the bank $5,894. you may try out different NPER values to see how much you’ll owe the bank at various points.Excel’s scenario managercan help you analyze different scenarios more efficiently.
Calculating the Future Value of a Savings Account With FV in Excel
To use the FV function for a savings account, you need three inputs:
The future value calculated by FV, in this case, is your savings balance.
It’s worth noting that, unlike loans, FV can only be positive in savings scenarios. Another difference is that you should input the PMT value as negative since you are the one lending money.
Let’s take an example to understand this better. Suppose you want to save $300 monthly (PMT) in an account with an annual interest rate of 12%. You can use the FV function with the inputs mentioned earlier to determine how much you will save in two years.
Since the arguments should use the same time units, you can input 24 months instead of two years for NPER. Here’s how you can use the FV function for this scenario:
Note that this formula returns the future value of the savings account two years after you started saving and assumes that the savings balance was zero beforehand. If you already have saved a specific amount, you should input the negative value as the PV argument.
So, if you already have $1,000 in the savings account, the formula below will give you the future value in two years:
If you have a specific FV in mind,Excel’s Goal Seekcan automatically adjust other arguments in the formula to achieve your goal.
Excel’s FV function is a versatile tool for financial forecasting, whether you’re assessing the future implications of a loan or projecting the growth of your savings. This foresight is invaluable, especially when planning long-term financial goals.
Once you’re comfortable using the FV function, try pairing it with Excel’s forecasting tools like Goal Seek to make more strategic financial decisions.
