Time is money: An introduction to financial calculators

The math remains the same.

Written byDoug Ashburn

Fact-checked byDan Rosenberg

Photo illustration showing an exploded view of a clock with gears and parts interspersed with silver dollar coins, symbolizing the time value of money.

Understand five basic variables.

Have you ever shopped around for a mortgage or auto loan? Have you invested in a certificate of deposit or Treasury bond, or looked at a chart of stock market returns? Or are you an older investor who’s been pitched a guaranteed lifetime income through an annuity?

If you answered “yes” to any of the above, you’ve probably seen charts, calculators, and other tools—perhaps filled with jargon and math terms that fly over your head—that intend to steer you toward an immediate action.

We’ll let you in on a secret: There’s no magic in the tools. In fact, there’s really just one basic formula, and once you understand it, you’ll become an empowered, confident consumer—whether you’re borrowing, lending, investing, or saving.

Key Points

Compounding accelerates investing returns, but inflation works against them.
A fixed-rate home mortgage is borrowed money, but you get the asset (i.e., a roof over your head) today and some protection from the effects of inflation.
All calculators—retirement, mortgage, bond, annuity, etc.—can be boiled down to the same basic money math formula.

Understanding the time value of money

Time is money.

You’ve no doubt heard that before, but what does it mean? Simply put, if you have money you’re not using, you can let someone else (such as a bank or the U.S. Treasury) use it for a certain amount of time, and they’ll pay you interest for the privilege. The more time, the more money. Conversely, if you need money to buy a car or home or finance an education, you’ll pay the bank for the privilege of using their money.

When you invest in the stock market, you’re essentially taking an ownership stake in various companies. That investment entitles you to a share of those companies’ earnings now and in the future. As earnings grow, so does the value of your investment.

Let’s start with some terms to understand up front:

Present value vs. future value. If you have money and invest successfully, you’ll earn a return on it. Those earnings are added to your money pile, which means earnings grow increasingly faster the longer you’re invested. That’s the power of compounding. You can’t earn interest now on money that won’t hit your wallet for another 10 years (and which you may never receive), so future money is worth less, all things considered, than today’s money. In other words, you’d rather have $10,000 today than $10,000 in five years. If you have $10,000 today, and it grows at 6% per year, in five years you’ll have $13,382. (More on that later.)
Real vs. nominal returns. Inflation erodes your money’s future value. Even inflation as low as 3% per year means money in your wallet now will be worth only about half as much in 20 years. So that nominal return of 6% in the example above would be—assuming annual inflation of 3%—a real (i.e., inflation-adjusted) return of 3%.
Fixed-rate loans as inflation protection. When you buy a house using a 30-year fixed-rate mortgage, you’re borrowing money and making monthly payments with interest. On the surface, that runs counter to the power of compounding. But you get the house up front, which means you no longer have to pay rent to keep a roof over your head. Plus, you own the asset (the house) in today’s dollars, which essentially shields you from housing price inflation. It’s something to consider when weighing the pros and cons of buying or renting a home.

Compounding: Interest on your interest; returns on your investment returns.

Encyclopædia Britannica, Inc.

Once you understand how time erodes value and how earning interest can blunt the impact, you can calculate the interest needed to achieve your goals, and explore investments—and perhaps loans—to get you there.

Time value of money calculator

time value of money calculator

time value of money calculator by

There are five basic inputs for calculating the time value of money:

Future value
Present value
Interest rate or rate of return (remember the difference between real and nominal rates)
Time (the number of periods from start to finish)
Payments (contributions to an investment account or payments on a loan)

You can calculate pretty much any money math question by adding in all but one variable and “solving for X.” Not a believer? Refer to the calculator posted here and play around with the numbers. For example:

Want to know the future value of a $10,000 investment in a five-year certificate of deposit at 6% interest? Plug in the present value ($10,000), interest rate (6%), number of periods (5), and calculate the future value. Did you get $13,382.26?
What if you were to add $500 to your investment each year, say, by buying additional CDs (also at 6%)? Add that as “payment” and see the future value jump to $16,200.80.
What rate of return would you need to earn over 10 years if you invested $10,000 today and wanted $20,000 at the end, and you plan to add $500 each year? Plug in those numbers and solve for the interest rate. (Note that you’ll need to enter the present value as a negative $10,000.) Did you get 10.98%? Congratulations.

Getting comfortable with the money math

Pretty much anytime you interact with money, you’ll encounter some version of this same basic money calculator. Some interactions might feel more complex, with more moving parts, but they’re really just different iterations of present value, future value, time, rate of return, and payments. For example:

A retirement calculator, such as this one in Britannica Money, will ask for your current age, expected retirement age, current savings, how long you’d like your money to last, and a few other things. But it’s really just a more granular view of the basic formula.
Are you a bond investor? Do you understand yield-to-maturity, why some bonds trade at a premium or discount to par value, and how those values are determined? Same calculator.
A mortgage or other loan calculator is no different from a compounding calculator, except that with a loan, each payment draws down the balance you owe, rather than adds to the balance you earn. (Remember how the present value was entered as a negative number in the rate of return example?)
An annuity—where you invest a pile up front (usually to an insurance company) and then receive a monthly payment for decades (or for the rest of your life)—can be quite complex, but really, that’s because of its flexibility. Annuity choices and calculations help the issuer pinpoint the expectations of time, present and future value, payments, and rates of return.
An annuity is a mortgage—with you on the other side of the table. Think about it: When you take out a 30-year mortgage, the bank gives you a pile of money up front, and then earns a return on that investment for the next 30 years. How is that any different than when you buy an annuity?

The bottom line

If you’ve made it this far, congratulations. You can make saving, investing, and borrowing decisions with an extra dose of confidence. You might even find yourself doing the money math calculation when making day-to-day purchases. (Should I buy a gallon of milk today, or a half gallon now and another next week? Do I want a new smartphone, or should I keep this one for another year?)

Just don’t get carried away. The time value of money is part of a long-term approach to building wealth. Maximizing future value is great, but sometimes you need to enjoy a little value in the present.

Instead of depositing and withdrawing money whenever you wish, a CD is a “timed” account.

Encyclopædia Britannica, Inc.

This article was most recently revised and updated by Doug AshburnThis article was most recently revised and updated by Dan Rosenberg