While the uncertainty of markets can have a dizzying affect on the future value of an investment, there are some ways to get a good basic estimate on value. If an interest rate is fixed or limited to a foreseeable range, simple equations or free online calculators can help determine the future value of an investment. When considering an investment that is variable, it may help to study market predictions and the past performance of similar investments.
To determine the future value of investment, simple math and a few given values are the only things required. For instance, if a person invests $100 US Dollars (USD) in a savings account with a 5% fixed annual interest rate, at the end of one year, he or she will have 100 + [(100 x 5%) + 1 year], or $105 USD. If the interest compounds, meaning that each year, interest is calculated based on the initial investment plus the interest gained in prior periods, the equation needs to include the starting amount, plus interest, for the next period. Therefore, for year two, the equation would read 105[(105 x 5%) +1 year], leading to an answer of $110.25 USD.
With a fixed interest rate, it is also possible to gain a general estimate of how long the amount will take to double in value. Called the "rule of 72," this simple equation can help give a good, if not always exact, doubling period based on a single initial investment. To use this rule, divide 72 by the interest rate, so that an equation for an interest rate of 8% would read 72/8 = 9. Thus, a single sum investment with an interest rate of 8% will double every nine years. If a person invested $100 USD in such an account, he or she would have $200 USD in 9 years, $400 USD in 18 years, and $800 USD in 27 years.
When determining the future value of an investment with a variable interest rate, or one in which the investment will be increased over time, the math can become much more complex. An easy way to handle calculations for more complicated investments is by using an online calculator or investment software. These programs allow the user to enter multiple interest rates, account for additional investments over time, and can even present a range of likely outcomes. While the mathematically inclined can certainly work out all the equations by hand, turning to an accurate calculator can be a good way to save time.
Even calculators and software cannot account for all potential factors that may affect the future value of an investment. When investing in highly variable sources, such as stocks, it may help to become educated about the market. Studying how the stock market works and reading expert analysis of upcoming trends, dips, or futures can help give an investor an idea of how his or her money will perform. Learning about the market can also help an investor choose where, how, and when to handle different types of investments. While risk and uncertainty are a part of any variable interest investment, spending time truly studying the past, present, and future of the market can allow the investor to make better choices.
