What Your Financial Calculator Must Do

This is a follow-up to "20 Essentials for Achieving Financial Literacy."

Any serious finance student (or serious self-directed investor) must have a serious calculator. When it comes to finance and investing, you will need to do a heck of a lot more than just add, subtract, multiply and divide. So if you're serious about managing your investments like a pro, make sure you pick up a financial calculator that, at the very least, can perform the following five functions.

1. Present Value

Definition: Present value is the current value of a certain amount in the future, given an interest rate which is compounded with some rate of frequency. This is sometimes referred to as "discounted value."

Practical scenario: Say that you recently got married and want to buy a house in five years. (Don't miss "From the S&P to Tiffany: Big Plans? Start Investing Now") You determine that you will need to have a down payment of $60,000 in five years to buy a house in your targeted price range. How much will you need to invest today in a certificate of deposit (CD) for five years that pays an annual interest rate of 5% on a semiannual basis to fund that future down payment?

Formula:

PV = Present Value; FV = Future value; i= annual interest rate; t = years and n = frequency of compounding (2 for semiannual, 4 for quarterly)

Answer: You will need to invest $46,871.90 today.

2. Future Value

Definition: Future value is the reverse of present value. Future value is the amount to which an investment will grow, given an interest rate which is compounded with some rate of frequency.