Future Value – More Examples

Okay, what I'm going to do now is do a little set of examples, which will kind of make you think a little about the Power of Compounding. And by the way, I also say this often, that if you understand compounding you have arrived. Because it's mindbogglingly complex. It is very nonlinear. And very difficult to understand. And this is where i'll introduce Excel. So, let's do a problem it's up there. Suppose you invest $1,000 in the bank at an interest rate of 10%. We'll stick with the round numbers just for convenience. We have done one period, we've done two periods. The one period is very easy, you can do it in your head.

The two period started becoming a little bit complex, right? So, what did we have? Two periods. We had to worry about what? Not just the 100 bucks a year that was being earned on the original 1,000, but what happens to the 100 bucks after one year? It should also earn money. It didn't do anything wrong. Right? Money is money. Here let's have 10 periods, so let me draw the timeline.

I'm asking the following question. You put 1,000 bucks in the bank and what do you have after 10 years? And how many periods have passed?

Ten. So I'm asking, what is the future value of this?

Right, so let's write out our numbers. We'll take P ( 1 + r), raise to power how much? Not 2, but 10. Let's fill in the numbers. So RP was $1000. R (1+0.10). Remember, the rate of return is always with decimals in it right. You don't want to make it ten write ten directly. That can be a pain. And raise to power 10. Now, if you stare at it and if you could do this in your head, there's something seriously wrong about you. I mean, you shouldn't be doing such problems in your head because you have better things to do in life.

So, what I want to do next is, when we come back, we'll introduce you to Excel, but remember, the functions we use will be very similar to the terminology we used before, okay? So, be prepared. I would ask you to spend some time, try to figure out where Excel is, pull out the spreadsheet if you haven't done it before, and we'll do it together.