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FV calculation
Old 12-30-2005, 08:04 AM   #1
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FV calculation

This is a question for the finance majors. If my cost of living is 4k per month currently, what would the figure be assuming 3% annual inflation in 10 years at my time of "retirement". I've looked for the formula but can't find it.

Does anyone, (perhaps brewer12345) have the formula/answer.

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Re: FV calculation
Old 12-30-2005, 08:12 AM   #2
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Re: FV calculation

Try a compound interest calculator like the one at the Dinkytown website: http://www.dinkytown.net/java/CompoundInterest.html

Or if you are interested in historical inflation, you could use an inflation calculator like http://www1.jsc.nasa.gov/bu2/inflate.html

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Re: FV calculation
Old 12-30-2005, 08:14 AM   #3
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Re: FV calculation

4000 x 1.03^10

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Re: FV calculation
Old 12-30-2005, 08:18 AM   #4
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Re: FV calculation

3% inflation means next years costs are 1.03 times this year's costs. *The year after, 1.03 times again; that is, 1.03*1.03=1.032=1.0609 times this year's costs. *Et cetera. *After 10 years, 1.0310=1.34392. *Multiply this times $4000 to get $5375.

However, don't apply such formulas mechanically. *Some things go up more than others (medical care, for example), so if these things are a big part of your life now, they will be even bigger in the future. *And if you have a fixed-rate mortgage, then your payments will not increase in dollar terms.

In other words, understand what you are calculating, and understand the limits of accuracy that you can expect.
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Re: FV calculation
Old 12-30-2005, 10:24 PM   #5
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Re: FV calculation

If you're using monthly numbers, you'd have to divide the 3% by 12, and multiply the years (10) by 12...
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Re: FV calculation
Old 12-30-2005, 11:59 PM   #6
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Re: FV calculation

4000*(1+3%/12)^10*12 or 4000*(1+.0025)^120 = 5397.414189

In Excel: =FV(3%/12,10*12,0,-4000)
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Re: FV calculation
Old 12-31-2005, 07:16 AM   #7
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Re: FV calculation

Quote:
Originally Posted by Have Funds, Will Retire
If you're using monthly numbers, you'd have to divide the 3% by 12, and multiply the years (10) by 12...
Quote:
4000*(1+3%/12)^10*12 or 4000*(1+.0025)^120 = 5397.414189

In Excel: =FV(3%/12,10*12,0,-4000)
Not to be a stickler for interest theory .... but to go from a yearly rate to a monthly rate, you can't just divide by 12, just like you can't multiply by 12 to go the other way. You have to take "1 + yr" to the power of "1/12", and then minus 1. So for 3%:

monthly rate = (1+.03)^(1/12) - 1 = .2466%

Though the rates are almost equaly, especially if you round to two decimal places. And the difference in the above example is only $21.75.

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