How to Do Time Value of Money (TVM) Calculations on BA II Plus

In this blog post, I’m going to show you how easy it is to do a Time Value of Money calculation.

To catch you up, for the past few months I’ve been studying for the Qualified Associate Financial Planner (QAFP) exam, which I’ve just taken. I won’t find out my results for another 4-6 weeks, so while I’m anxiously waiting to find out if I passed (or failed), I thought I’d make some videos that can help you, whether you’re studying for a financial exam or just want to know how to calculate how much you need for retirement or how much you need to pay every month to become debt-free.

What Is the Time Value of Money?

To get started, the Time Value of Money (or TVM as I’ll be referring to it), is simply the concept that money available in the present is worth more now than the same amount in the future.

This concept is the basis for calculating the present and future values of cash flow, like if I invest $1,000 today and continue to invest $5,000 every year at an 8% interest rate, how much will I end up with in 30 years? Or, if I have $10,000 of debt with an interest rate of 20% and pay $500 every month to its balance, when will I become debt-free?

But it can be used in so many other scenarios. Suppose you’re gearing up to take a financial exam like me, whether it’s the Canadian Securities Course exams (which I did back in 2020), the QAFP or CFP exams, or any other type of financial exam. In that case, TVM is essential to know by heart. And the good thing is, once you know it, it makes almost any financial problem really easy to solve. But even if you never plan on taking a financial exam, this is pretty handy to know when it comes to better understanding how to properly plan for your financial future.

BA II Plus Calculator

Okay, let’s get into it. I’m going to be using the classic Texas Instruments BA 2 Plus. This is the standard when it comes to financial calculators, I would say. If you don’t own one, you can easily find one on Amazon. Or, you can download the app on your phone. There’s a free version with ads or you can buy it for $5. Just know, though, if you ever have to use one for an exam, you need the physical calculator.

Calculator Tips to Remember

Now here’s the most helpful thing you’ll ever learn about doing a Time Value of Money Calculation. For me, it was a total game-changer when I learned it through the Business Career College when taking my QAFP Exam Prep course (which I’d highly recommend).

Think of your calculator as if it’s a spreadsheet, and use this guide for punching in your values and in the right order.

Now, this will require some memorization, which can feel overwhelming at first, but once it’s in there, it’s locked in, you’ll see how easy it is to do pretty much any TVM calculation.

So here’s the order to set to memory. P/Y, C/Y, xP/Y, I/Y, PV, PMT, FV, Begin/End.

P/Y refers to periods per year. So if you were to make contributions to your investment portfolio annually, you would set it to 1. If you contributed monthly, 12. Semi-monthly, 24, Bi-weekly, 26. Weekly 52. And daily, 365. Same thing if we’re dealing with debt payments.

C/Y is the compounding frequency or the number of compounding periods per year. Now, when it comes to doing a financial exam, unless the compounding period is obvious or clearly stated, such as annually, the C/Y should always match the P/Y.

So, if your investment contribution is compounded annually, you’d set it to 1. If it compounds monthly, 12. And so on, just like with the P/Y I just showed you. You can use the up and down arrow keys to jump between the P/Y and C/Y and when you change one of their values, make sure to hit ENTER to set it.

xP/Y means times periods per year (so it multiplies the periods per year). In other words, how many years are we talking about. For example, let’s say you invested money every year for a total of 8 years, you would put 8 as your xP/Y.

I/Y is the interest rate or rate of return. That’s pretty straightforward.

PV is present value, so how much money are we starting with.

PMT is the payment (like a debt payment or investment contribution).

FV is future value, so how much money are we ending up with in the future.

Then there’s Begin or End. This function is for when the payment is made at either the beginning or end of a period. By default the calculator assumes the payment happens at the end of the period.

For example, if you’re doing a TVM calculation to find out how much an investment will grow over time, it will assume your investment contributions are happening at the end of the month or year, or whatever your P/Y is.

In general, most calculations are in END mode, but if you were doing a calculation for a mortgage for example, because you’re making a mortgage payment at the beginning of the period, not the end, you’d select BEGIN mode. Similarly, if you’re doing a calculation in which you want to know how much money you can take out of an investment to live on in retirement, likely you’d be taking that money out at the beginning of the month or year, so it would also be set to BEGIN mode.

Ok, now that we’ve got that out of the way, let’s do some calculations.

TVM Example #1 – Future Value

Ok, so let’s pretend we’re starting with $1,000 and plan on investing $5,000 every year. We expect an 8% rate of return on our investments and will be investing for a total of 30 years. How much will we end up with?

Looking at this information, we know that our P/Y and C/Y are both 1 because we are only investing once annually. So, we would hit 2nd to access the second row of keys, then P/Y, then the value 1, and automatically the C/Y is one, which you can see if you hit either the up or down arrows. Then, to exit this second row of keys, we’d hit 2nd and then Quit.

Next, we know the xP/Y is 30 because we want to invest for a total of 30 years. To do this on the calculator, type in the value first (30), then 2nd, then xP/Y, then again so it jumps to the N spot.

Next, we know that we expect a rate of return of 8%, so we’re going to punch in our value of 8 then I/Y.

Next, we know our present value is $1,000, so we’re going to punch in 1,000, but we’re going to make it a negative number by hitting the +/- button. We’re making it a negative number because it signifies money going away from us as we’re making a contribution to an investment or payment on a debt. If we were receiving money, like an interest payment or income, so the money is coming to us, we would keep that number positive. Once the number is negative, hit the PV button. Also important to note, the PV and FV cannot both be positive or negative. If you do this, you’ll likely get an error message on your calculator. If the PV is negative, then the FV has to be positive and vice versa.

Next, we know that we want to contribute $5,000 annually to our investments, so that would be our payment. So punch in 5,000, make it a negative number because that’s money going away from us, then hit PMT. We’ll also assume we’re making this contribution at the end of the year, not the beginning, so we will keep it in END mode, which is the calculator’s default.

Then, all that’s left to do is find out the Future Value.

So hit the CPT button, then FV, and we should have our answer.

P/Y	1
C/Y	1
xP/Y	30
I/Y	8
PV	-1000
PMT	-5000
FV	?
Begin/End	End

Which is $576,478.71. To recap, we’ve calculated that if we’re starting with $1,000 as our initial deposit to our investment portfolio, and then contribute $5,000 at the end every year for 30 years to our investments, at an 8% rate of return, we’d end up with $576,478.71.

And if you want to check your math, you can always use an online compound interest calculator like this one.

TVM Example #2 – Future Value

Now, if you wanted to do monthly payments, for example, remember all you’d have to do is set the P/Y to 12 and then divide the $5,000 by 12 ($416.66) for the new PMT amount. Here’s what that would look like.

P/Y	12
C/Y	1
xP/Y	30
I/Y	8
PV	-1000
PMT	-416.66
FV	?
Begin/End	End

We end up with $596,949.35.

Now you may be wondering, why do you end up with a higher amount monthly? Well, remember, our original calculation had us invest the annual $5,000 at the end of the year. When we’re doing these monthly contributions, we’re investing that money at the end of every month, so that money is being invested earlier, giving it more time to grow.

TVM Example #3 – Future Value

This might make you conclude that investing monthly is better than investing annually. But let me show you the difference if we simply invested that $5,000 lump sum at the beginning of the year instead of the end of the year.

P/Y	1
C/Y	1
xP/Y	30
I/Y	8
PV	-1000
PMT	-5000
FV	?
Begin/End	Begin

We’d end up with $621,792.

By simply investing that lump sum at the beginning instead of the end of the year, you end up with $44,713.29 more money compared to the end of the year.

TVM Example #4 – Payment

Now, let’s tackle the opposite of investing. Paying down debt. The good thing is, it works almost the same way.

Let’s say we want to figure out how much we need to pay onto our debt every month for us to become debt free in 2 years. We currently have $10,000 on a loan with an interest rate of 20%. To keep things simple, interest will compound annually. We’ll use end mode to assume we’re making payments at the end of each month. And for this calculation, we’re solving for PMT, not FV. We already know that we want our Future Value to be zero at the end of the time frame because that means there is zero debt left to pay by that point. But what we don’t know is how much we need to pay every month to get to that point.

P/Y	12
C/Y	1
xP/Y	2
I/Y	20
PV	-10000
PMT	?
FV	0
Begin/End	End

Okay, so now we know we need to pay $501.03 at the end of each month to become debt-free in 2 years.

TVM Example #5 – Payment

But what if interest doesn’t compound annually, but monthly instead? Because that’s exactly how credit cards work. Interest compounds monthly based on your average daily balance. With this in mind, if you owed $10,000 on your credit card, this is how much you’d actually need to pay off to become debt-free in 2 years.

P/Y	12
C/Y	12
xP/Y	2
I/Y	20
PV	-10000
PMT	?
FV	0
Begin/End	End

Your monthly payments would be $508.96 to become debt-free in 2 years. As you can see, you’re paying a little bit more each month because of the compounding frequency.

Conclusion

Now, I could go one and show you so many more scenarios to test out, but instead, to help you get more familiar with using your calculator and solving TVM problems, I’ve linked a few different websites that have TVM problems for you to practice with. The more you practice, the quicker you will be doing them. Which is essential, especially when you’re doing an exam like the QAFP where you only have about 90 seconds to solve each exam question.

Now this really is just the tip of the iceberg. You can also use TVM to solve for bond problems, mortgages, and so much more, so I’ll be sure to make some more videos on those very soon.

Thanks so much for reading (and watching the video above), and let me know if you have any questions in the comments.

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