One Formula – Many Lessons To Learn

What is the formula of finding future value of an investment? Let us talk plain arithmetic here. The formula is FUTURE VALUE = PRESENT VALUE OF INVESTMENT * (1 + ANNUAL COMPOUNDING RATE OF RETURN) ^ NUMBER of YEARS. What lessons can we learn from this seemingly easy looking formula? Let’s check.

One thing is pretty clear from the above formula, if somehow, we can increase either present value of investment or rate of return or number of years – the overall future value would increase for sure. But how easily that can be done and how much control we have in each one of these three factors? Let’s check one by one.

Present value of Investment: This can be increased, but up to a certain limit which is our investible surplus amount. Naturally, we cannot and should not borrow and invest. This can be increased only if somehow, we can earn more and save more. Earning is the only one thing, that can be increased without any upper limit. But for that we have to work hard and also need to invest in ourselves. But even then, it is not that simple.

Rate of return: On this factor, we have the least control among all three. Very few of us have the time, skill and resources to continuously study and research various investment avenues so that return can be increased continuously for years.

Investment period: This is the last and the only factor that can be increased beyond any limit by each of us, only if we start investing early. But the greatest irony is that very few of us consider and focus on this factor. We blame ourselves for not being able to earn more or save more. We blame our investment advisors for not being able to suggest us investment schemes with higher return. But the factor which is in everyone’s control – that is increasing the period of investment – hardly gets any notice!