Most people are only familiar with at – the – surface finances, which is okay, but a deeper knowledge is needed for more day to day intuitive things. The more you know about finances and how to manage your money as a single mother, the better it is. The same is true for all things relating to finances – from investments to paying bills to paying or mortgages or paying for loans. This is all very important to our daily lives and should be learned in more depth to have a better understanding of transactions we make often. This article will cover two things: Present Value and Future value all learned from a course at University of Michigan
Knowing how to manage finances for single moms is very important.
via Coursera.
But before that a couple ground rules:
• A dollar today is worth more than a dollar tomorrow. If you have a choice, you will benefit more out of the dollar “today”. Also remember that risk plays a big role, and it can’t be avoided. So the dollar today allows for a lot more control over your assets.
• Timelines can be made to put everything into perspective and really help to map out your long term and short terms goals in terms of finances.
• Don’t compare money against time. These are two separate variables. Remember “risk” goes hand in hand with investments and which is why you cannot link those two as the same thing.
• Some common and accepted variables and formulas are:
PV = present value
FV = future value
R = rate
P = principle
N= number of periods
What is future value?
Other than the obvious definition, the value of something in the future, the actual concept of future value goes a lot more into depth to truly understand the gist of it. Also future value is something that can only be calculated by taking into account variables like interest rate. When compounded annually, this really can turn into a big number down the road (given that there is no loss in the investment)
What is present value?
Present value is what you have now in your possession. This is basically yours to keep (unlike future value, which is very dependent on outside factors). Present value then can be compounded according to the interest rate to come up with a projected future value.
Future value and present value can be converted back and forth if you know the number of periods (number of years), the interest rate (the percentage the principle will increase each year), and the principle (present value/what you start with). Again, more than the formulas, it is more important to know how they each compare to each other.
When investing, it is important to know the definitions of each and how to calculate and covert between each. You can easily find the values through Microsoft Excel and even a simple calculator or financial calculator. The more you understand the techonology, the easier computations become.
Understanding these terms and what they mean is very important when it comes to learning more about financial planning and “one-upping” yourself in your knowledge.
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