When we talk about sustainability, we usually think about natural resources. However, after today’s lesson on exponential growth, I realized that money could also be sustainable. Can you sustain your wealth? The answer is yes.
According to one of the ten principles of finance, a dollar today is worth more than a dollar tomorrow because of inflation. So what can we do to prevent this from happening? INVEST!!
To assess if an investment is good, you must be able to compare the value of money that you invest today with the value of the money that you expect to receive in the future. We can do so by using the future value formula, which is EXACTLY like the exponential growth formula.
FV = PV * (1 + r) ^n
FV= future value (expected value); PV= present value (in terms of investment, PV is the total money you invest on a project); r = the project’s rate of return; n = time
Let’s say you invested $1000 in a 5-year project with a 10% rate of return, and you would like to know the expected value of that investment:
FV = 1000(1+ 0.1)^5 = 1610.51
1610.51 – 1000 = 610.51 = the “extra” money you are expected to earn from that investment.
For example, say our parents invested $30,000 in the same project with the same rate, only difference is that this time it’s a 18-year old investment (could be for our college tuition)
FV = 30,000 (1+0.1) ^ 18 = $166,797.51
The net profit you make from that investment = 166,795.51 – 30,000 = 136,797.51