178) How to Use TVM Calculators

178) How to Use TVM Calculators for Future Financial Needs

This video is suitable for Unit Trust Consultants, Private Retirement Consultants and those who want to calculate for their own financial planning.

Watch and learn how to use the TVM calculator to calculate Future Value, Present Value, Interest Rate and Payment values to achieve your financial goals.

There are few terms that seems confusing for some users.

a) Mode: End vs Beginning

In the END mode, the payments are done at the end of each period. If the period is Monthly, then the additional investment is made at the end of the month. If the period is Quarterly, then the first additional investment is made at the end of the 3 months later.

However, when you made investments at the beginning of a period, it is the BEGINNING mode. It basically means you start the first additional investment immediately.The second payment will be at the beginning of the second period. If the period is Quarterly, then the second investment is made at the end of the 3 months later.

Hence, the Future Value in the BEGINNING mode will be higher than in END mode. Just draw a timeline to visualize and it should become clearer.

b) Compounding: Monthly vs Annually
In the Setting, the system asks for Annual Rate %. For Compounding, the system asks for Monthly, Quarterly, Annually, etc. So what is the difference?

Let's look at the Annual Rate of 6%.

For Compounding Annually, the investment is compounding at 6% for the 1 full year.
For Compounding Monthly, the investment is compounding at 6%/12 = 0.5% every month.

You will get more Future Value for monthly compounding. It is because the returns earned in the first month is also used for investment for the second month.

The total amount (returns & principal in first month) is compounded in the second month.
The total amount (returms & principal in first and second months) are compounded in the third month onwards. It repeats till end of 12 months.

Example: 

A) Annually Compounding
Present Value: $1,000
Annual Rate: 6%
Periods: 1 year
Compounding: Annually
Future Value = $1,060.00

For manual calculation:
FV = PV(1+i)^n
FV = 1000 (1+6%)^1
FV = 1060.00

B) Monthly Compounding
Present Value: $1,000
Annual Rate: 6%
Periods: 12 months
Compounding: Monthly
Future Value = $1,061.68

For manual calculation:
FV = PV(1+i)^n
FV = 1000 (1+6%/12)^12
FV = 1000 (1+0.5%)^12
FV = 1061.68

Click the link below on how to use a scientific calculator to calculate Exponential values.