Calculating the future value of money using inflation rates is necessary because inflation, over the years, decreases your buying power. By taking inflation into account, you takes steps to ensure that you'll have the money necessary for your retirement or to send your child to college.
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Things you need
Find the real interest rate by taking the interest rate of your investments and subtracting the rate of inflation. For example, if your nominal interest rate is 10 percent and the average rate of inflation is 3 percent, then the real interest rate is 7 percent.
Calculate future value. The formula to calculate the future value of money is Future Value = Present Value x (1 + (interest rate)) compounded by the number of interest payments received. The financial formula looks like this: FV=PV x (1 + i)ⁿ.
Understand this example: $10,000 invested at a nominal interest rate of 10 percent, with a real interest rate of 7 percent, accounting for inflation, for 20 years with interest compounded annually looks like this: FV = $10,000 x (1 + .07) to the 20th power.
Know how to calculate interest compounded in other ways. If the interest is compounded monthly, divide the interest rate by 12; compounded quarterly, divide by 4.
Tips and warnings
- Use an online calculator when you calculate future value of money using inflation rates rather than trying to do this by hand.
- Remember that inflation rates are variable and subject to change year over year.
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