time value of money (1)

If I’m to choose only one concept that is most important in investment, I will choose the concept of time value of money.

It can be used to elaborate a lot of important concepts in investment.
It is not difficult: its maths is learnt in secondary school.
I really hope this concept of time value of money can be taught in secondary school.

FV = PV * (1 + r) ^n
FV: future value
PV: present value
r: rate
n: number of years

1. Power of Compounding

To illustrate, $100 now, put in bank, at interest rate of 5%.
For
1 year: FV = $100 * (1+ 5%) ^ 1 = $105
2 year: FV = $100 * (1+ 5%) ^ 2 = $110.25
3 year: FV = $100 * (1+ 5%) ^ 3 = $115.76
……
10 year: FV = $100 * (1+ 5%) ^ 10 = $162.89
See how the value increases. This explains the power of "compounding effect".
(to be continued)