Do you wonder where in real life you’ll get to use at least some of the math formulas you learnt in school?
I finally found the one you can use.
You know compound interest works magic on your money, with this formula you get to see how it works.
You’ll be able to see the impact of changes in interest rates, investment contributions, investment duration and how much your investments can grow over time.
This is 2019, so no one has time for Δy/Δx or any almighty formula, so we are going to this with a simple spreadsheet function that you can use on Excel.
To compute the future value of a regular investment contribution:
=FV(rate, nper, pmt, [pv], [type])
rate: Is the rate of return. Note that if you are making payments monthly or quarterly, then you would need to divide the interest rate by 12 or 4 respectively.
nper: Is the number of investment periods. Note that if you are making payments monthly or quarterly, then you would need to multiply the number of years by 12 or 4 respectively.
pmt: Is the number of fixed payments per period.
pv: Is the starting investment amount. Note that this will usually be zero because the account is new and has no value yet.
type: Is the timing of the investment contribution. This will be zero if it’s at the end of the period or one if it’s at the beginning of the period.
fv: Is the value at the end of the investment period. Note this should have a negative sign
For example, investing N10,000 at the beginning of every month at a constant return of 12% per annum for 10 years. Then just enter this function in excel
=FV(1%, 120, -10000, 0, 1 )
You should get N2.3 Million, which is the value that N10,000 invested every month at 12% per an num will grow into after 10 years.
To compute how much you need to invest regularly to hit your goal:
=pmt(rate, nper, fv, pv, type)
To compute the rate of return to hit your goal:
=rate(pmt, nper, fv, pv, type)
Note that if you are using monthly contributions, then you need to multiply the rate by 12 to see annual percentage return that is required.