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What Are the Best Tips for Determining the Future Value of a Lump Sum?

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  • Written By: Naomi Smith
  • Edited By: A. Joseph
  • Last Modified Date: 25 November 2016
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    Conjecture Corporation
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Determining the future value of a lump sum can be useful for managing finances, planning for retirement or deciding which investment vehicle to chose. Financial formulas and calculations are complicated, making the easiest method to use one of the financial calculators that can be found on personal finance websites. The inputs include: the interest rate, number of years, amount of the lump sum and whether the interest is compounded. A search for "financial calculator" will yield many results from which to select the most appropriate one.

The interest rate is the most important and most problematic factor in determining the future value of a lump sum. Financial calculators are based on the assumption of a fixed interest rate, making them most accurate for shorter periods of time. If possible, find a calculator that allows for multiple interest rates.

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Interest rates do not make huge jumps from year to year in most countries, but over the course of 10 or 15 years, the rate might change quite dramatically. Thus, for long-term estimates of the future value of a lump sum, it might be more accurate to calculate the value by a series of five-year estimates with different interest rates for each five-year period. To do this, enter the current lump sum, the interest rate estimate for the first five years and "5" for the number of years. Use the result of this as the principal, enter the estimate of the interest rate for the second five-year period, and use that result as the starting value for another five-year period.

It is necessary to know whether the interest is simple or compound and, if it is compound, how many times per year it is compounded. Simple interest is paid once per year only on the original principal amount, and compound interest means the deposit earns interest on the interest as well as on the principal. If interest is paid once per year, it is compounded annually; monthly compounding means interest is paid each month into the account, and the future value of a lump sum will grow even more quickly.

Be careful when entering the interest rate into any calculator. Some ask for the annual rate as a percentage, but others might ask for a decimal. Five percent would be "5" for the former, but "0.05" for the latter. If the future value of a lump sum seems incredibly high or low, check that the interest rate has been entered in the correct format.

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