An annuity is a series of equal-sized payments that are made on a constant basis during a fixed period of time. Payments can be made at the end of the period, called an "ordinary annuity," or at the beginning of the period, called "annuity due." Learning how to compute the future value of an annuity is very helpful when planning your financial future.
Instructions
# Write down the formula. The formula for the future value of an ordinary annuity is: FV(OA) = PMT [((1 + i)n - 1) / i].
# Determine the payment. The payment is the amount that you receive or pay into the annuity the annuity each period. For example, if you were receiving $1,000 a month from rental income, your payment would be $1,000. If you were paying $500 a month into an investment, your payment would be $500. The payment amount is plugged into the (PMT) spot of the formula.
# Determine the number of periods. The number of periods is equal to the amount of payments you intend to collect or make. For example, if you plan to pay $50 a week for 15 years into an annuity, your number of periods would equal 750 (52 weeks --- 15 years = 750.) Plug the number of periods into the (n) spot in the formula.
# Determine the annual interest rate. The interest is stated as a percentage and is the rate at which your money will be growing.
# Calculate the (i) in the formula. Divide the annual interest rate from step 4 by how many periods it will compound during one year. For example, if the annual interest rate is 15 percent and you make 12 payments a year, (i) will equal .0125 (.15/12 =.0125.) This equals the interest rate per period. Plug the rate into each (i) spot in the formula.
# Solve the formula. The result is the total future value of the ordinary annuity. For example, if the PMT=$100, n=120 and i=.005 then the future value would equal $16,387.93.
Tips & Warnings
* Make sure you follow the order of operations. If not, you will end up with a wrong calculation.
* When calculating (i), remember to divide the annual interest rate by the total number of periods within one year.
