Python Tutorial: Present and Future Value

Want to learn more? Take the full course at https://learn.datacamp.com/courses/introduction-to-financial-concepts-in-python at your own pace. More than a video, you'll learn hands-on coding & quickly apply skills to your daily work. --- Let's discuss one of the most fundamental financial concepts - Time Value of Money. The value of money itself changes over time, and I can prove it with a few simple statements. Would you rather have 100 dollars in your pocket now, or 100 dollars in your pocket tomorrow? Of course, you'd rather have 100 dollars in your pocket today because it's more valuable to have it in your hand and to be able to do something useful with it today instead of tomorrow. Now, what if I offered you 10,000 dollars now, or 10,500 dollars one year from now? The decision becomes much harder to make. How much is the extra 500 dollars earned by waiting for a year really worth to you? The reason why it's difficult to make a decision is because you are actually comparing two different types of values, even though both offers are in dollars. The 10,000 is in present value dollars, and the 10,500 is in future dollars. You can't compare them directly. But you can, however, estimate the future dollar value of the 10,000 dollars in present value by figuring out what you could do with it over the course of a year. You could, of course, take the 10,000 dollars and stash it in a savings account at your bank, earning 1% per year, risk free. That's fine, but you can earn more if you take more risk. Take the 10,000 dollars, invest it in the stock market, and earn 8% per year on average. You could also lose money, or make more than 8%, but on average the return will be roughly 8%. Or finally, you could simply take the 10,500 dollars if you wait for one year. What you've done by examining these options is computed the future value of each scenario. This then allows you to compare the scenarios since they are all denominated in the same time-based currency, w