There are a large number of financial calculators that can help you manage your finances, calculate loans, or plan for retirement. One of the most useful tools is the TVM calculator.
TVM stands for time value of money. It will show you the present or future value of a particular amount of cash that you either have right now or will receive.
Let’s dig into this and see why this is important for you and how it will help you make better financial decisions down the line.
What Is Time Value of Money
Before we direct you to the calculator and show you how to use it, you need to first understand what the time value of money is.
The time value of money is a financial concept that recognizes the principle that money available today is worth more than the same amount of money in the future.
TVM Example
If you could receive $10 today or $10 next year, you’d rather have the money now. Waiting for $10 next year makes no sense because you can take $10 now and spend it.
We can conclude that ten dollars today are worth more than ten dollars in six months, which are worth more than ten dollars next year. And that’s the basic idea behind the time value of money — over time, the value of the dollar drops.
The time value of money is just a way to figure it out quantitatively (using numbers).
If ten dollars next year are worth less than ten dollars today, how much less? If you can receive $8 today or $10 next year, you might think about it for a second.
Here, we’ll quickly introduce the new term: NPV, or net present value.
In this example, the net present value of $10 next year is whatever amount you’d be willing to trade it for today.
If you’d rather have $9 today than $10 next year, but you’d rather have $10 next year than $8 today, we’d say that the NPV of $10 next year is $8.50.
TVM Calculator
Now that you know what the time value of money is, let’s see how you can use this money calculator to your advantage. On first glance, the calculator looks simple enough, but there’s a lot to it:
As you can see, there are different categories that you can calculate:
- Present value
- Payments
- Future Value
- Annual Rate (%)
- Periods
Using The TVM Calculator
Let’s assume you want to calculate the future value of an annuity. For the sake of this example, you deposit $500 at the end of each quarter for 2 years in an investment account that earns 7% per year compounded quarterly. We have two questions that we need to answer:
- What’s the amount of the annuity?
- How much interest does it earn?
Now, once we add everything into the calculator, you get something like this:
First of all, you notice that the present value is 0. This is because you do not have any lump sums of money that you are depositing into your cash flow.
These two categories need further explanation: payments and periods!
When you enter payments to calculate the future value of money, you need to put the negative sign (-) in front of it because that is the money you spend.
But how did we get that number 8 in the periods category? You are depositing money QUARTERLY for TWO years! One year has four quarters, and all you need to do is calculate 2×4 to get the number of periods.
After that, you just do the calculation. Press the “FV” button, and you’ll get the result:
Let’s answer our first question. With the annuity payment of $500 quarterly, you get the future value, which is: $4,253.77.
Important:
$4,253.77 consists of all your payments, including the interest rate. You do earn interest here, but how can you calculate how much interest you have earned?
All you need to do now is subtract the money you deposited from the money you earned:
So: The money earned – quarterly payment x periods
- $4,253.77 – $500×8
- $4,253.77 – $4,000 = $253,77
- The interest earned is $253,77
As you can see, using this calculator requires some knowledge, but hopefully, we’ve helped you with this example. You can also calculate any other category in the time value of money calculator by adding relevant details.
Calculations With TVM Formula
The time value of the money calculator we shared makes it really simple to calculate your present and future value. But there’s another way to reach the same results manually. You can use the money formula below:
Here are all the financial functions used and what they mean:
- FV=Future value of money
- PV=Present value of money
- i=Interest rate
- n=Number of compounding periods per year
- t=Number of years
With the money formula, you can quickly get the results and answers you’re after. However, it is much easier to revert to any online TVM solver and not do the math yourself.
Future Value vs. Present Value: What to Do With This Information?
Now that you know how to calculate present and future value, and understand the concept, what can you do with such information? Here are some common uses of this calculator
- Investments – Calculating the value of your investments is essential. With the help of the calculator, investors can see if some investments pay off. Obviously, there are other factors at play, but assuming you do everything right, you’ll get close to your estimation. This is beneficial because investing is a long-term game and knowing the approximate goals helps.
- Loans – You can determine the amount of your periodic payment for personal loans. This is one of the primary purposes of time value of money calculators. Whether students are paying off their loans or you have a car loan that you want to map out, you can definitely estimate the future and present value of money and see what to expect.
- Finance – Time value of money is important for your personal financial situation. It is a handy tool, which can help you with the monthly payments, investing, calculating a loan or simply financial planning and budgeting.
Time Value of Money Is Important for Lifestyle Banking
Where this calculator really comes into play is if you already have a financial system, such as lifestyle banking. The goal of lifestyle banking is to help you improve your financial situation and create generational wealth.
The system is based on whole-life insurance and creates uninterrupted growth in your cash value.
When you buy whole-life insurance, you need to pay premiums that go towards your cash value. In the meantime, you use the cash value as collateral to take a loan from the insurance company. With the money you get from loans, you become quite flexible in your budgeting and investments.
Additionally, you will pay yourself interest to capture even more of the money and get the most value from this system. The interest earned and continuous compounding of your cash value allow you to improve your cash flow significantly over time.
With lifestyle banking, you can plan your future, solve annuity problems, cover debts like a mortgage or car loan, or invest in your business. In the beginning, it might take some time to get things going, as there are many variables at play. But every beginning is difficult, and you can notice the benefits of this system after several months.
Stay Proactive and Track Your Finances
Keep in mind that lifestyle banking can help you solve your financial issues, whether they are related to your business or lifestyle. However, you’ll need to stay proactive, and solving the problems will not happen automatically.
You are the one who needs to solve the issues, and lifestyle banking is the concept that only provides the necessary structure. A part of proactivity is calculating the time value of money with the calculator we’ve provided and using this and other tools to help you plan your future.
Watch Our Free Masterclass
If you want to learn more about lifestyle banking, we invite you to watch a free masterclass! You can see why this system is so effective and what the difference is between an insurance company and a bank.
After that, we can help you set up lifestyle banking in your life and create generational wealth. Until then, try using the TVM calculator to see how much your investments will be valued in the future.