The investment calculator is a multifunctional tool that helps you to make the appropriate investment decision based on the type of investment you're interested in. For example, you can not only estimate the final balance of your investment, but you can also quickly assess what your initial balance, periodic contribution, or rate of return should be to reach your ultimate goal. Besides, you can estimate the time needed for a specific investment to achieve a chosen desired balance.
As the tool incorporates multiple features, you can specify your investment to a great degree. For instance, you can set the average inflation rate which helps you to find the purchasing power of your final balance and indicates if you have gained or lost in reality. The built-in dynamic graphs, namely, the Final Balance Breakdown and the chart of your Annual Balances, give you a better insight into the structure of your investment, and you can easily follow its progress through its lifespan.
A short survey on investment
In the broadest sense, an investment is an asset or item acquired with the primary goal of generating income. In an economic context, an investment is something that is purchased that is not consumed today, but is instead used in the future to create revenue. In finance, investment means an acquisition of a financial asset or allocation of money that provides income in the future or will be sold at a higher price for profit. Any benefit arising from an investment decision is called a return. A return can take several forms; for example, it can be a gain (or loss) realised from selling a particular asset or investment income as dividends or interest.
As a general rule, investors expect higher returns from riskier investments. Hence return and risk are strongly interlinked. If you would like to know more about this relation, you can have a look at the Sharpe ratio, where this topic is explained it in more detail. To reduce overall risk, it is often advisable to diversify a basket of assets or portfolio. In this respect, you may check the CAPM calculator that helps you to find out the appropriate expected return of an asset or portfolio.
This calculator focuses prominently on financial investment that generates income in the form of annual return or interest. If you are interested in a property investment, you may look at our cap rate calculator, which can help you to evaluate a property.
Specifics of the Investment Calculator
Before you make any investment, you need to know how different factors affect your revenue. Besides, to be able to employ this tool properly, and to understand its computational basis, it is essential to get familiar with its specifications.
- Initial Investment and Desired Balance
These are the initial balance that you start your investment with and the final balance that you reach or intend to obtain. In financial term, they are the present value and the future value, which are linked together by the time value of money, which is one of the most fundamental concept in finance. To learn more about how the present and future values in an investment are related, check out the IRR calculator.
- Rate of Return
This is one of the most relevant factors in your investment. It generally refers to the change in the value of the investment or its cash flow, such as interest payments or dividends. In this calculator, it is prominently associated with the annual interest rate, or, more precisely, the percentage rate of the invested amount for a year. If you would like to estimate the return over a full term of an investment, you may check the ROI calculator, which gives you more insight into the profitability of an investment. ROI tells you how efficient your investment is or allows you to compare the performance of a couple of different investment options. This calculation is done by checking how much return you will get on your investment, taking into account the costs.
This is the time frame that you intend to resign from the usage of the money to gain profit.
- Compound Frequency
Compound interest is one of the most powerful concepts in finance, and most financial/investment products are based on this. Compound interest might be defined as an income that is earned not solely on the initial amount invested but also on balance augmented by the previously earned interest. It is easy to see that, more often compounding occurs, the higher the interest accrued. Eventually, this can have a significant effect on the final balance, especially in the long-term. The most simple compounding frequency is yearly, which means that interest is calculated on your balance annually. In the real world, however, compounding happens more often, for example, semi-annually or monthly, depending on the type of financial instrument. Compounding may occur even more frequently. In theory, it can reach its highest frequency, called continuous compounding, which is the theoretical limit of the process. For more insight into this mechanism, you can learn interesting things in the Natural logarithm section of the log calculator.
- Annual Inflation Rate
Since inflation can substantially change the buying power of an amount of money, it is essential to take into account its dimension. When the inflation rate is high, the real inflation-adjusted return, or real interest rate, on your investment is lower, which may even not compensate for the purchasing power loss caused by hikes in the general price level. In such a case, although in the nominal term you made a profit, in the real term, you lost on the investment.
- Additional Contributions
In this section, you may set a specific amount that you intend to add to your investment during its term. Besides its amount (How much?), you can specify its regularity (How often?) and its timing (When?), which can be the beginning or the end of the period. Also, you can set the contribution's annual growth rate or periodic growth rate. The option to set a growth rate for the additional deposit allows you to follow an expected increase in the money devoted to your investment or to compensate for the purchasing power loss resulting from inflation.
How to use the Investment Calculator?
As now you are familiar with the main components of this device, you can learn how to apply it to different issues.
Begin by choosing the subject you are interested in, which can be the following:
- Final Balance
This feature gives you an answer for probably the most basic question: What will be the final balance of my investment?
- Initial Investment
If you choose this option, you can estimate how much money you need to invest at the beginning of the term to reach a specific goal.
- Periodic Contribution
With this function, you can quickly compute what money you should allocate in every specific period to get the desired final balance.
- Time Length
The purpose of this option is to get an answer for a slightly trickier question: How long should I wait to reach a specific goal?
- Rate of Return
Finally, this function is designed to estimate the annual rate of return that is necessary for realising a desired balance.
After specifying the question, you can analyse the output in multiple ways. You can find the result over three sections:
In the Results section, you can read all the relevant information about your final balance and its compositions. Also, you can learn the effect of inflation if you decide to include that aspect.
Under the Final Balance Breakdown in Percentage, you can learn how the final balance built up and how its components relate to each other.
The Annual Balances section allows you can choose from various representations according to your preference where you can follow the progression of your investment year by year. The three options are a line chart, a bar diagram, and a table.
How to estimate the future value of your investment?
To help explain the previously outlined features, we will now go through a simple example for the most basic function of the tool: What will be the future value of my investment?
- To find the future value, you need to choose what you would like to know, which is the "Final balance" in this case.
- Determine how much you are willing to invest initially. Note that you can set the initial investment to zero as well; however, in such a case, you need to set an additional contribution to your investment.
- Set the rate of return.
- Determine the duration of your investment.
- Choose the compounding frequency.
- Decide if you'd like to include the inflation rate.
- If you would like to allocate additional money with a specific regularity, first choose how often you would like to do. Note that your initial investment, thus your principal, will augment by this amount until the end of the term.
- Set how much money you would like to add to your investment.
- Specify when you would like to settle the contribution to the periods.
- Decide if you would like to set any growth rate to the sequence of the contributions.
Read the output information and review the charts for more details.
Interest on investment formula
If you want to know how to calculate the final balance of your investment over a period of time, the equation is the same for any asset:
final_balance = initial_amount * (1 + interest_rate / compound_frequency)(compound_frequency * years).
The time period will usually be one year, as interest rates are often calculated annually. There are also other equations used to estimate various investments. Their complexity depends on how many variables you want to take into consideration (effects of inflation, changing interest rates etc.). If you need more information you can check out the article on the Wikipedia where you can find not only the formulas for periodic compounding and continuous compounding, but also for interest calculations on mortgage rates etc.