How to Calculate Interest Rate Using Present & Future Value

Calculate the interest rate needed to hit your future value target.

Calculate the interest rate needed to hit your future value target.

When you invest or save a certain amount of money, you sometimes have a specific number in mind that you want the investment to reach in the future. For example, you might deposit money today and need a set amount later for a down payment on a car. The money you deposit today represents the present value, while the amount to which it will grow after accumulating interest is the future value. If you know these amounts and how long you can let the money sit, you can calculate the interest rate you need to earn to achieve your financial goal.

Divide the future value by the present value. Say you want to know the annual interest rate you need to earn to grow $1,000 today to $1,750 in 10 years. Divide $1,750 by $1,000 to get 1.75.

Divide 1 by the number of periods you will leave the money invested. Each period can be a month, year or some other interval. In this example, you’ll invest your money for 10 years, so divide 1 by 10 to get 0.1.

Raise your Step 1 result to the power of your Step 2 result. In this example, raise 1.75 to the 0.1 power to get 1.0576.

Subtract 1 from your result. In this example, subtract 1 from 1.0576 to get 0.0576.

Multiply your result by 100 to calculate the interest rate as a percentage. This percentage represents the rate your investment must earn each period to get to your future value. Concluding the example, multiply 0.0576 by 100 for a 5.76 percent interest rate. You need to earn 5.76 percent annually to get to $1,750 in 10 years.

Tip

  • The more time you can leave an investment untouched, the lower the interest rate you’ll need to earn to reach your future value.
 

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