FV Example I: Saving Regularly

I would encourage you to now see the beauty of applications and, as I said, we'll build applications slowly, but then we'll do some pretty complicated stuff. And we'll spread it out in the first two modules, because I want the first two modules of this course to give you concepts applied but then really applied To more complex situations. Same concepts. So let's start off with this. Please read it. What will be the value of your bank account, if you deposit $1000 every year in a bank? You plan to leave home in five years, and expect to earn 5% in your bank account. So you're in college, you started investing every year, $1000, in the bank.

So the key thing is, it's an annuity, of how many years? One, two, I won't write out all the numbers. So you are going to put it at five. So you know n is Five. What is the other secret? The other secret is what is r?

It's equal to 5%. Now in Excel, when you put this number, n will be five, but R will not be in percentage terms. Sometimes in calculators it is, HP calculators especially. As far as I know, or most calculators. Here you'll enter 0.05. Please remember that. But the final thing to remember is If you are putting in 1000 bucks.

How many times are you putting it in? 1000 times. Now the little bit tricky next to this is convention is that a normal annuity doesn't start at time 0. It starts a time one, as I said. You can change it and in the future you can start some payment at time zero, you can start saving, all it does is shifts the timeline. But a standard formula assumes the first payment is at the end of the first year, and the last one at the end of the fifth year.

Okay, so we'll stick with that for the time being when you become proficient with moving money over time and that's why I say watch Star Warz Matrix and you'll be cool in finance. You have five payments at the end of each period so the question is, in excel this is what you'll do. You'll do equals and what are you trying to figure out? Remember you're trying to figure out the future value and this is a cool problem because everybody is thinking about this. Okay I need money in the future. I'll save now. I'll save every year if possible. And how much will I have when I go to college?

Say so future value you want, but the first number in future value is which one? Rate. You press, I would encourage you to open your Excel and do this with me. Put cell A1 = FV 0.05. What next? 5, which is for n, yes? And the next number, remember the convention, we'll look for PMT. So now you're okay, you can put 1,000. But is there any PV or anything going on? No, so you'll close the parenthesis, and you'll have, hit return. And if you hit return, you, as I said, because you put a positive number here, you'll get a negative number here. Here.

If you want to make this negative, all you can do is put a negative sign, or put a negative sign in front of FV. And in this context, it makes sense because you're investing for the future. You're losing $1,000. You'll get it in the future, so you may want the final number to be positive, but that's just in your head, so if you want to be really painful looking at it from your perspective, not the banks. You may want to make all these numbers negative. That's just up to the problem. So, what will this turn out to be? I think this will turn out to be 5,000 $525.63.

I would encourage you every time I do a problem, I'll do right now very focused problems. First of all. So let's try to undo this, and I'll do that a lot in this class. Okay, suppose interest rates were zero. How much would you have? Very simple, 5,000. Because why? You're putting 1,000 every year 5 times. However, you're getting 525 bucks more than the 5,000. Why are you getting that? Because of, as I've said, all answer's at compounding.