Investing is a crucial aspect of personal finance, and understanding the future value of investments is essential for maximizing returns. Future value (FV) is the value of a current asset at a future date based on an assumed rate of growth over time. It allows investors to determine how much their money will grow over a specific period. In this article, we will delve into the concept of future value and explain the difference between exponential and additive rates of growth.
Money builds on itself over time, but it does so at an exponential rate, not an additive rate. When you invest money, each dollar you invest has the potential to grow exponentially. This means that for a single period at an interest rate of r, your money will grow to a specific amount per dollar invested. The growth is not linear but rather compounded, resulting in significant returns over time.
Understanding the power of exponential growth is crucial for successful investing. It means that even small investments can generate substantial returns if given enough time. By harnessing the concept of future value, investors can make informed decisions about their investment strategies.