Present value
What a future amount of money is worth today, after discounting it at a chosen rate of return.
PV = FV ÷ (1 + r)^t
Explanation
Present value (PV) answers the question: “How much would I need today, invested at rate r, to end up with this amount later?” It is future value run in reverse. You divide the future amount by one plus the rate, once for every period you have to wait.
The discount rate you choose matters a lot. A higher rate means money today grows faster, so a future payment is worth less now. A longer wait has the same effect. Small changes in either can move the answer by thousands of dollars over long horizons.
In scenarios, present value shows up when the app works out how much you need saved by a target date, when it values a stream of future pension or Social Security payments, and when it expresses future balances in today’s dollars (discounting by inflation instead of by an investment return).
Example
You want $50,000 in 10 years for a child’s education, and you expect to earn 4% a year.
- Growth factor: 1.04^10 = 1.4802
- Present value: $50,000 ÷ 1.4802 = $33,778
So setting aside about $33,778 today at 4% would grow to $50,000 in 10 years.
Compare a 7% return: 1.07^10 = 1.9672, and $50,000 ÷ 1.9672 = $25,417. The higher expected return lowers the amount you need today by about $8,361, but it usually also comes with more risk that the return is not achieved.