Time Travel: Present and Future Value Calculations

Video Transcript 

My name's Robert Bonavito, New Jersey forensic accountant. This video is part of a series of videos where I discuss forensic accounting topics for educational purposes only. If this was a litigated matter, I would take a different approach, have different conclusions based on different facts and circumstances.

Hi, my name is Robert A. Bonavito, a New Jersey forensic accountant. This video is a part of a series where I discuss forensic accounting topics, business evaluation topics, lost profit topics. Today's topic is gonna be really exciting, especially for me. It's about time travel. I know you're saying, "Well, Bob, you don't appear to go over and learn something about forensic accounting." But time travel and finance are intertwined. And the way it's intertwined is through the calculations of present and future value.

Let me just tell you a little bit...a little story. My Uncle Don, who is a Dutch banker, and if you know anything about banking, you know that the Dutch actually invented banking many, many hundred years ago, hundreds of years ago. And Uncle Don, when I was 11 years old, he called me over to his house, and he said, "You know, let me show you something." And what he showed me was this time travel, where you could actually transport yourself into the future 30 years or 40 years, and you would know where you stand financially. And what he said was when he was 20 years old, his uncle sat him down and he told him what I'm gonna tell you. He explained to him that if...with using a net present value and future value calculations, you could transport yourself into the future. And how...an example that he gave him, they said, "Listen. If you could put $5,000 a month into investments for 30 years, at the end of the 30 years, you'll have a certain percentage in the bank." And what they said was if, let's assume 15%, and you were able to do that from age 20 on. At age 50, they calculate it using this time travel technique, you would have $34,616,000 in the bank at age 50. And that's why finance, and net present value, and future value are so exciting because you can predict where you're gonna be.

In fact, they told him, they said, "If you could do it weekly instead of monthly, you would have a $153 million in the bank at age 50." So he could transport himself into, you know, at age 50 and be sitting there with a $153 million in the bank. And these calculations work out. I know you're saying, "Bob, but, you know, maybe I could scrounge the money and put that into an investment, but 15% is a lotta money." And let me just tell you that I have a sheet here and these are some returns, Vanguard funds. Now, there's lots of low-cost funds out there, and there's low-cost investment advisors that can help you get reasonable returns. And a lotta people tell me, "Oh, I can't earn 15%, I can't earn 10%." I just don't believe it because it's done year in and year out. And just look at these funds. I mean, Vanguard is one. There's many other funds. You have TD Ameritrade, Charles Schwab, Scottrade. Any low-cost, really good investment advisors can get these returns. If you look at the five-year returns here, you'll see most of 'em are over 15%, okay? So what my Uncle Don told me is possible, if you're frugal, you save the money, you invest in low-cost investment vehicles, and most importantly, use these time travel techniques that finance gives you, net present value, future value.

If we go a little bit further, you'll see what I've done here is I've actually just given a representation of the formulas so you can play around with them. But really, present value is a pretty simple calculation. Right here you have PV equals C divided by one plus R to the N. The R is simply your return. So in this case, if we're using 15% percent, it's 1.15, and the N is the number of years, if it's 3 years, 4 years, 5 years. And future value naturally is just the opposite. Instead of dividing, you're gonna multiply, but it's basically the same calculation. And here we have...I've also have here an example of an annuity. What is an annuity? Annuity's just a perpetuity, mean that it's gonna go into the future, $5,000 every year, where these 2 first calculations are basically one payment. If you're gonna do annuity, that's kinda what my Uncle Don was talking about, where they...his uncles told him, "Put $5,000 in every month, or every week, or whatever. Or listen, instead of 5,000, you can make it $500 or $5." The fact of the matter is, down the road at age 50, you're gonna have a ton of money in the bank. But the formula for a perpetuity or annuity is a little bit more complicated. But remember, a lotta spreadsheets can do this, but I think it's important that you understand how it works mechanically. And if you look here, we got C, one divided by R. And then it's one plus R to the N minus one. If you go through the math, you'll see that if you did that for 5 years, you would have $33,000 in the bank.

And this power of compounding that enables you to accumulate this vast amount of wealth, you know, the $153 million or the $700 million or whatever it is. And you know, listen, we all see this stuff on television. Somebody who was a bus driver or janitor, they pass away, and when the kids go and look in the bank account or look in their investment account, they have, you know, $15 million or $20 million. Why do they have that? Because they use this time travel technique. They put the money, they invest the money over a long period of time in low-cost vehicles, and, you know, I don't know if they actually sat down and did the number crunching, but they could've done it. They could've said, "Hey, when I'm age 70, I'm gonna have $15 million in the bank," and maybe spend it all, or give it to kids before, or whatever. But I'm telling you is time travel, and net present value, and these finance techniques are very, very important. I think it's important to understand how they're calculated, and then you can use, like I said, spreadsheets or whatever you want.

I really appreciate you're watching this video. If you have any questions, feel free to email me or call me. Again, my name's Robert A. Bonavito, a New Jersey forensic accountant.

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