Posted in Finance, Accounting and Economics Terms, Total Reads: 1388
Definition: Anticipated Balance
This essentially refers to the net balance in a given account at any given time in future. The amount that a savings bank account will have at some future date or amount that a fixed (time) deposit will have at its maturity can be called as anticipated balance and is mainly used in the context of financial planning. The term itself is self-explanatory. That is, it is calculated by adding the interest rate to the principal amount and hence calculating the amount which will be present in a given account any future date. Anticipated balance takes into consideration only the guaranteed cash flows and reflects a conservative balance. The interest rate used is generally the risk free rate and the final amount at any given point of time in future is calculated using the corresponding account specific method of adding interest (simple interest or compound interest).
Key Assumptions: Generally, It assumes compound interest, rather than simple interest for the calculation of future value and also the principal amount is assumed to be constant.
Example: Let’s say I want to buy a car 3 years from now and I need to pay Rs. 1 lakh as the down payment. So the anticipated balance after 3 years from now is Rs. 1 lakh, so that I am able to drive a car. I need to do my financial planning accordingly, so that my balance at the end of third year is at least 1 lakh. We can assume compound interest and can calculate the amount if compounded by the risk free rate will give 1 lakh in 3 years. That’s how the theory of anticipated balance is used in the financial planning domain.