TVM Calculator: Money Value Explained

The Time Value of Money (TVM) is an important concept within finance. It shows that money today will typically be worth more than money received at a later date. This is due to the ability to invest your money, gain interest and earn returns. By using a TVM Calculator you can work out how much your money will be worth over a certain period of time depending on the interest rate, time and payment period.

You can help to make smarter financial decisions by knowing the time value of money.

For example, receiving more money in the future as you can invest your money now and gain interest over the next 5 years. For example, receiving $10,000 today may be more valuable than receiving $10,000 in 5 years.

A TVM Calculator makes working out these figures easier. You can work out:
Present Value (PV). This is how much your money is worth today.

• Future Value (FV). How much your investment can be worth.
• Interest Rate. How much you can earn per year in interest/return.
• Number of Periods (N). How many times you have invested or paid.
• Payment (PMT). How much you are paying or investing each period.
• Our Time Value of Money Calculator can help to quickly work out various

financial scenarios for individuals, investors, students and financial planners in the United States.

How to use the Time Value of Money Calculator

Working out the Time Value of Money is straightforward. Simply follow the steps below to work out the Present or Future Value.

Step One – What you want to find

Select what financial variable you want to find. This can include Present Value, Future Value, Payment, Interest Rate or Number of Periods.

Step Two – Present Value (PV)

Type in how much money you currently have. For example, $10,000.

Step Three – Future Value (FV)

If you are working out the Future Value type in how much you are expecting to have in the future. Otherwise leave blank.

Step Four – Interest Rate

How much interest you will earn per year. Type in percentage. For example, 5%.

Step Five – Time to Invest

How long you are investing for. Generally type in how many years.

Step Six – Regular Payment

If you are making regular payments type in how much you are paying. For example, $200 a month.

Step Seven – Compounding/Payment Frequency

Select the frequency you want to use. This can include yearly, half yearly, quarterly or monthly.

Step Eight – Calculate

Once you have filled out all the information click calculate. This will show you an estimated figure. Take a look at the figure to see how your interest, time and payments affect your money.

Time Value of Money Formula

There are formulas to calculate the Time Value of Money. These will take into consideration the interest rate, investment time and payments.

Future Value

This formula calculates how much your current investment may be worth in the future.

FV = PV x (1+r)n
Where:
FV = Future Value
PV = Present Value
r = Interest rate per period
n = Number of compounding periods

Present Value

This formula calculates how much your money will be worth today.
PV = FV / (1+r)n
Where:
PV = Present Value
FV = Future Value
r = Interest rate per period
n = Number of periods

Future Value with Regular Payments

If you are making regular payments this formula will show you the future value of an ordinary annuity.

FV = PMT x [(1+r)n - 1]/r
Where:
PMT = Payment per period
r = Interest rate per period
n = Total number of payments

Payments are assumed to be made at the end of each period.

Present Value with Regular Payments

If you are making regular payments at the end of each period.
PV = PMT x [1 - (1+r)-n]/r

This can help you evaluate different investments, savings, loan payments etc.

Example Time Value of Money Calculation

Let’s take a look at an example of how Time Value of Money works.
If you were to invest $10,000 into a savings or investment account with an annual interest rate of 5%. Over 10 years, assuming interest is compounded annually and no extra payments are made.

We know:

Parameter

Value

Initial Investment (PV)

$10,000

Annual Interest Rate

5%

Investment Time

10 Years

Compounding Frequency

Yearly

Additional Payments
$0

We can now use the Future Value formula:
FV = PV x (1+r)n

Now plug in our numbers:
FV = 10,000 x (1+0.05)10
FV = 10,000 x 1.628895
FV = $16,288.95

Estimated Future Value

$16,288.95

Your initial investment of $10,000 could grow to approximately $16,288.95 after 10 years.

Your interest earned will be:

$16,288.95 - $10,000 = $6,288.95

This shows how your money can grow with compound interest.

Understanding your Time Value of Money Calculator Results

After calculating you should understand what each figure means:
Present Value. This will tell you how much your future payment/investment is worth today.

Future Value. This shows you an estimation of how much your investment could be worth.

Interest Rate. This shows you how fast your money is growing or how much you are paying in interest.

Total Payments. This shows you the total value of your regular payments.
Number of Periods. This shows you how long your investment/payment is for.

Total Interest Earned. This shows you how much your money has grown with interest.

For example, if your investment has grown to $10,000 to $16,288.95 the extra $6,288.95 is interest earned.

Keep in mind that future values are just an estimation.

Factors that affect Time Value of Money

Various factors can affect your Time Value of Money.

Interest Rate

The higher the interest rate the higher the future value will be. If the interest rate is lower your money will grow slower.

Time to Invest

The longer you invest your money the more interest it can earn. The longer the time the more impact compounding can have.

Compounding Frequency

Your interest can be compounded yearly, quarterly, monthly or daily. The more frequently it is compounded the higher the future value will be.

Initial Investment

The higher the initial investment the higher the future value will be.

Regular Payments

Making regular payments can increase the value of your investment.

Inflation

Inflation can cause a loss in purchasing power. Even though your investment may have increased the actual value may be less.
Taxes & Fees

Investment taxes, account fees and other costs may affect your returns.

Benefits of Using a Time Value of Money Calculator

A Time Value of Money Calculator can be used by individuals, businesses, students and financial professionals.

Retirement Savings

Work out how much your retirement savings can be worth.

Investments

Compare different investment opportunities.

Loans & Mortgages

Understand how much you will be paying in loans.

Savings

Work out how much you need to save today or make regular payments to reach your target.

Business

Businesses can use the Time Value of Money to work out capital investments, equipment purchases and future cash flow.

Comparisons

Compare receiving money now vs receiving it in the future.

Learning

Students studying accounting, economics, finance and business administration can use the Time Value of Money to understand basic financial concepts.

Accuracy

A Time Value of Money Calculator will give you mathematical estimations based on the information you provide. The accuracy of your results will depend on the information you provide.

Some important points to note:

The interest rate will generally stay the same for the chosen period.
Regular payments assume you are making regular payments.

The compounding frequency needs to match the assumptions.

You may not be taking any unexpected withdrawals.

There will not automatically be an adjustment for inflation.

Taxes, account management fees or investment costs may not be included.

Investment returns can vary.

To ensure you have accurate information make sure your information is correct and take into consideration inflation, taxes, fees and investment risk. This calculator is for educational purposes and planning.

Frequently Asked Questions (FAQs)

1. What is a TVM Calculator?

A TVM (Time Value of Money) Calculator is used to work out the Present or Future Value of money. This takes into consideration the interest rate, investment time and regular payments. It can help individuals and businesses understand how their money can change in value.

2. Why is the time value of money important?

The time value of money is important as it means you can invest your money today to gain returns. Investors can compare financial opportunities, evaluate loans, plan for retirement savings and make informed decisions.

3. What is the difference between present value and future value?

Present Value shows you how much your money will be worth today. Future Value shows you how much your money can be worth in the future.

4. Can I use a TVM Calculator for loans/mortgages?

Yes! A TVM Calculator can help you to evaluate how much you are borrowing, how much interest you will pay, how much you are paying and how long you will be paying. However, you may need further information for mortgages and loans such as taxes, insurance, fees and payment terms.

5. Does this take inflation into consideration?

A standard TVM Calculator will not automatically take inflation into consideration. You will need to adjust your estimated value to take inflation into consideration.