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If you want to learn about terms used in the financial industry you might want to understand annuity due vs. ordinary annuity. Annuity is defined by TVMCalcs.com as ‘a series of equal cash flows paid at equal time intervals for a finite number of periods.’ In simple terms, an annuity is a product that will grow an asset over time. An annuity due is a term used to identify payments that are due, or paid, at the beginning of a specific time period. You invest your money with a broker, or a financial institution, and you receive a payment on that investment. You will have the option of being paid at the beginning of the month or at the end of the month. When paid at the beginning of the month you have an annuity due. When paid at the end of the month you have an ordinary annuity.

Both annuity due and ordinary annuity describe the time value of your money. In theory, the money you have today is considered to be worth more than the money you will have in the future because of the investment potential of your funds. If you invest your money wisely, you will increase the future value of your dollar. There is a difference between annuity due and ordinary annuity.

The difference in the two terms is because of the time frame that each type annuity refers to. When the cash flow occurs at the beginning of the month it is called annuity due. When the cash flows occurs at the end of the month it is called ordinary annuity. The payment amount will be the same, but the amount at maturity and the amount you receive will differ. Let’s look at an example.

To calculate your ordinary annuity use the formula C x[(1-(1+i)^-n)/1]. C is the amount of the payment; n is the number of payments; i is the rate of interest. You make a payment of $1000, five times, at 5% interest. The equation will be $1000 x [(1-(1+.05)^-5)/1]. The value of your ordinary annuity is $4,329.48.

To calculate your annuity due multiply your ordinary annuity value of $4,329.48 by (1+i). The equation will be $4,329.48 (1+.05) = $4,535.95. Because you have the additional time period, the beginning of the month versus the end of the month, you will have a higher figure. Be sure to ask the advice of a financial planner to determine which of the annuities is most beneficial for your specific financial situation.