Investment Calculator
| Period | Deposit | Interest | Ending Balance |
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Investment Calculator: A Simple Guide to Growing Your Money
For most of us, we know we should be investing but only few of us know who can describe what that money will look like in a decade. That's where an investment calculator helps you: enter in the amount you are saving and watch your money grow, using none of the formulas or spreadsheet functions needed to create it.
This guide covers what the calculator does, what each of the value means, and how to analyze the results.
What an Investment Calculator Does
An investment calculator is used to predict future value of money. It takes parameters that you specify and calculates the value of a portfolio at an ending date. The value provided is a good planning number but should not be taken as a guarantee due to the impossibility of predicting real-world market conditions. However, it can take some of the guesswork out of figuring out, say, "how much should I set aside each month," or be used to test "what if" questions.
5 different calculation options are offered by the calculator: End Amount, Additional Contribution, Return Rate, Starting Amount and Investment Length.
End Amount
What you will have in the end, as a result of your contributions and returns.
Additional Contribution
How much should you add – to a specific frequency – to hit a certain goal?
Return Rate
What's your expected annual market return? A larger number does not increase the probability of that number being accurate.
Starting Amount
How much should I start with in investments? – if I add $X each month, and wait $Y months, will I have $Z?
Investment Length
How much time does it take between a start amounts with ongoing contributions to hit a certain mark?
That last part is the part that makes the tool particularly valuable to planning: you can input a certain end amount (e.g., $250,000 to put a down payment on a home), and the other values become a way to arrive at a value that gets you there.
The Input Fields Explained
We can explain the options at a play in the calculator by going over the example:
- Starting Amount: Money you place into investments immediately. For this example, we've put in $20,000 to start us off. If you aren't already investing, consider 0 here – you can still make contributions and have time to compound returns.
- Investment Length: Time spent investing, set by a slider. We have a target of 10 years to wait.
- Annual Return Rate: Expect the market to grow at the average rate of 6% per year. You'll want to be cautiously optimistic when inputting this – in this case, a larger number wouldn't necessarily help your accuracy.
- Compound Frequency: How often interest on your invested returns – from both starting amount and ongoing contributions – get re-invested. We've set this to compound monthly. Your returns will be slightly higher when moved to this more frequent time interval.
- Additional Contribution: How much you expect to be able to contribute towards your goal – in this example, $1,000 a month.
- Contribute at the Beginning/End: Determines whether your additional contributions come at the beginning or end of a pay cycle, which can impact returns – we've kept this at the end, which is the more conservative estimate of when your money hits the market to start growing..
- Contribution Frequency: Decide whether you want to see calculations based off of monthly or yearly contributions.
The Calculation Results
For our example calculation ($20,000 start, $1,000 a month with 6% return, over 10 years compounding monthly), the calculator provides 4 values:
End Balance
$200,267.28 – the final amount in portfolio value.
Starting Amounts
$20,000.00 – what we had in our starting amount.
Total Contributions
$120,000.00. Twelve deposits of $1,000 a year (x10 years).
Total Interest Earned
$60,267.28 – how much our portfolio gains from compounding its value from our initial $20,000.
We can do a logic testing on these numbers: $20,000 + $120,000 + $60,267.28 = $200,267.28. Of the final amount, 30% comes from interest, while 70% came from contributions – in this case; it's much more than our own money.
Another way to express the 30% is: you put in $140,000 in total and ended up with more than $200,000 ($60,000 extra) and the extra gets compounded on itself.
Reading the Charts
The above values are all numeric, which can be difficult when you want to take a quick look at the progress over the lifetime of the portfolio. You can do that on the calculator with 2 charts.
The donut chart breaks the end amount into the parts specified in #3: what of your final amount comes either from your starting amount, any additions that you make to the portfolio, and the interest on it all.
The Growth over Time bar graph provides a quick way at seeing, well, how much your portfolio grows over time – you can see the individual stack for each year, and the 10th one has the thick band near the top. As the years go on, the same amount of deposits generates more interest due its larger base. Although the regular amount of money we add every year ($1,000) does not change, that extra deposit grows at the same 6% rate as the value of the portfolio grows.
Viewing the Accumulation Schedule
Below the graphs, the calculator provides a table of 4 values: Period, Deposit, Interest, and Ending Balance, and a toggle so you can see the progression on a yearly or monthly basis.
For instance, the yearly version of our example has this information on a yearly basis:
| Period | Deposit | Interest | Ending Balance |
|---|---|---|---|
| Year 1 | $12,000 | $1,569.12 | $33,569.12 |
| Year 2 | $12,000 | $2,406.03 | $47,975.15 |
| Year 5 | $96,747.03 | ||
| Year 10 | $11,253.39 | $200,267.28 |
Take the two middle columns and notice that your deposits remain constant at around $12,000 every year, but interest climbs from about $1,569 to just over $11,000, but the amount of interest increases in 10th year, the $50,000 or $4,832.87 is over 7 times more than in year 1 ($650.74).
If detail is what you're looking for, the monthly version will let you see those changes to your schedule at a more fine-grained scale – perhaps to see when it gets closer to a milestone like crossing the $100,000 threshold.
Why an Investment Calculator?
There are many advantages to using an investment calculation too: what made sense to you about the results? These are reasons why you might want to use it.
- It saves time and makes fewer errors: Calculating interest with contributions every month is tedious and one stray number entered incorrectly can derail everything that comes after – an investment calculator makes fewer calculation errors and saves people the time of working through the math.
- It creates a goal: "To retire comfortably" is not something you can really do with regular calculations – "I need this much at this point in my life" is more actionable.
- It shows the importance of starting early: Compare results using the same contributions across 10, 15 and 20 years – the difference will be immediately obvious.
- It let you be creative with your options: Want to know how an extra $200 every month will impact things? Want to try another rate of return that's less optimistic? The calculator let you try your ideas, safely, without losing savings.
- It let you set your rates of return realistically: Using a lower rate of market growth helps estimate how things could end up, if the market is less generous than you're expecting – that helps avoid getting discouraged when savings grow slower than anticipated.
- It is encouraging: It helps provide motivation to stick with a savings plan when you can see, the value increases every year.
- It is simple to use: the less of a barrier to entry there means the more people will benefit from using it. Anyone who can enter a few numbers can use it. Students, first-timers and experienced savers, everyone have reason to use it.
- It enables effective communication with a financial adviser. Have a plan and questions ready, it helps you have a good conversation.
How to Use an Investment Calculator Effectively
- Compare results: See how a certain combination of values stacks up against different scenarios.
- Set goals: work backwards with the additional contributions tab.
- Test assumptions: Lower the market growth a point or two and see how it impacts everything, or try a different length of time between starting and ending dates..
- Set reminders: Come back a year or two later and reevaluate, updating based on new income capabilities.
Things to Keep in Mind
An investment calculator will give you estimates, not absolutes that is why you must keep in mind following limitations of the tool:
- Market ups and downs: 6% is an average rate over time, while a market can gain or decline in a particular year.
- Inflation: $120,000.00. Twelve deposits of $0__200,000 today will not have the same value in the future.
- Taxes and management fees: they can cut into returns.
- Lifestyle changes and capacity: You may want or need to change the way you save down the line.
Using the calculated values for goal-setting and tracking can enable smart financial decisions. Keep the numbers close as a reference when making decisions and understand that they are an estimate that shouldn't be relied on to predict the future.
Conclusion
An investment calculation takes something theoretical – wanting to have more money in the future – and gives it shape and form. You provide a starting amount to be invested, along with a target date in the future, and see not only how much money that could grow to, but the value of a steady income stream. The provided charts and the table of years or months with deposits to be made show the value of endurance: the longer you can keep your earnings in place, the more growing will occur.