FV calculation

[ferco]

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.

 

[Martha]

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

 

[justin]

4000 x 1.03^10

 

[Robert the Red]

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.

 

[HFWR]

If you're using monthly numbers, you'd have to divide the 3% by 12, and multiply the years (10) by 12...

 

[Spanky]

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

In Excel: =FV(3%/12,10*12,0,-4000)

 

[ats5g]

If you're using monthly numbers, you'd have to divide the 3% by 12, and multiply the years (10) by 12...

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.

- Alec