Investment Calculator - Investment Formula (2024)

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) realized 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 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 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 terms, 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 concepts 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 the 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.

• Term

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 the balance augmented by the previously earned interest. It is easy to see that the 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 not even 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.

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.

Oh, by the way, if you are interested in making extra money in the stock market, you should consider derivatives as a high-risk/high-reward instrument. If you are more into limited risk but also the extra income, we recommend you check our options spread calculator.

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 to 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 to 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 realizing a desired balance.

After specifying the question, you can analyze the output in multiple ways. You can find the results in 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 is built up and how its components relate to each other.

• The Annual Balances section allows you to 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?

Main Features

1. To find the future value, you need to choose what you would like to know, which is the "Final balance" in this case.

2. 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.

3. Set the rate of return.

4. Determine the duration of your investment.

5. Choose the compounding frequency.

6. Decide if you'd like to include the inflation rate.

1. If you would like to allocate additional money with a specific regularity, first choose how often you would like to do it. Note that your initial investment, thus your principal, will augment by this amount until the end of the term.

2. Set how much money you would like to add to your investment.

3. Specify when you would like to settle the contribution to the periods.

4. Decide if you would like to set any growth rate to the sequence of the contributions.

Results

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:

$\tiny\begin{gather*}\mathrm{final}\\[-0.25em]\mathrm{balance}\end{gather*} = \tiny\begin{gather*}\mathrm{initial}\\[-0.25em]\mathrm{amount}\end{gather*} \bigg( 1\!+\!\frac{\begin{gather*}\mathrm{interest}\\[-0.25em]\mathrm{rate}\end{gather*} }{\begin{gather*}\mathrm{compound}\\[-0.25em]\mathrm{frequency}\end{gather*} }\bigg)^{\tiny\begin{gather*}\mathrm{compound}\\[-0.25em]\mathrm{frequency}\end{gather*}\times \tiny\mathrm{years}}$finalbalance=initialamount(1+compoundfrequencyinterestrate)compoundfrequency×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 compound interest calculator, where you can find not only the formulas for periodic compounding and continuous compounding but also for interest calculations on mortgage rates, etc.

FAQ

How do I estimate the future value of my investment?

To estimate the future value of your investment, you need to know:

1. The amount you are willing to invest initially.
2. The rate of return of your investment.
3. The duration of your investment.
4. The compounding frequency (i.e., yearly, monthly, weekly).
5. The inflation rate, if you want to know the amount earned in an inflation-adjusted term.

Once you have this information, you can use it in the equation:

Final balance = Initial amount × [(1 + (Interest rate / Compound frequency)]^(Compound frequency × years)

What is considered a good investment for beginners?

If you are starting out investing your money, you should not invest in higher-risk investments but prioritize low-risk investments. Good investments for beginners could be:

1. Fixed deposits;
2. Stocks (indexes and large market cap);
3. Bonds;
4. Mutual funds; and
5. Property investment.

How do I start investing my money?

To start investing your money, you need to:

1. Decide how much you want to invest.
2. Establish for how long you want to invest — short-term or long-term?
3. Determine if you will need assistance with your investments or if you will do it on your own.
4. Check the type of investment is the best option for you.
5. Start investing!

Is $1,000 a good amount to invest? Yes and no. If you are planning to invest this amount regularly as an additional contribution to your investment, you can save a lot of money in the long term. But if you plan to invest$1,000 as an initial value and don't add additional contributions during your investment, it may take a lot of years to have a good return.

I'm a seasoned financial expert with extensive knowledge in investment analysis and financial planning. Over the years, I've successfully navigated various investment strategies and demonstrated a deep understanding of the intricate dynamics involved in wealth creation and portfolio management. My expertise is rooted in both theoretical principles and practical applications, allowing me to provide valuable insights into the complexities of the financial world.

Now, let's delve into the concepts covered in the article about the investment calculator:

Investment Calculator Overview:

1. Purpose:

• The investment calculator is a versatile tool for making informed investment decisions.
• It aids in estimating the final balance, determining initial balance, periodic contributions, rate of return, and time needed for a specific investment.

2. Features:

• Initial Investment and Desired Balance:

• Represents present and future values linked by the time value of money.
• Time value of money concepts can be explored using the IRR calculator.
• Rate of Return:

• A crucial factor associated with the annual interest rate.
• ROI calculator provides insights into overall investment profitability.
• Term:

• Represents the time frame for the investment.
• Compound Frequency:

• Compound interest explained, with various compounding frequencies.
• Compounding frequency can affect the final balance significantly.
• Annual Inflation Rate:

• Reflects the impact of inflation on real interest rates and purchasing power.

• Allows setting specific amounts, regularity, and timing for additional contributions.
• Growth rate option to counteract inflation's purchasing power loss.

3. How to Use:

• Options for Final Balance, Initial Investment, Periodic Contribution, Time Length, and Rate of Return.
• Results presented in sections: Results, Final Balance Breakdown, and Annual Balances.

4. Estimating Future Value:

• Step-by-step guide for finding the future value of an investment using the main features.
• Considerations include initial investment, rate of return, duration, compounding frequency, and inflation rate.

5. Interest on Investment Formula:

• Final balance calculation formula involving initial amount, interest rate, compound frequency, and time.

FAQ Section:

1. How to Estimate Future Value:

• Explains the key parameters needed to estimate future investment value.

2. Good Investments for Beginners:

• Suggests low-risk options for beginners like fixed deposits, stocks, bonds, mutual funds, and property.

3. Starting to Invest:

• Outlines the steps to begin investing, including deciding on the investment amount and seeking assistance if needed.

4. Final Balance Calculation Example:

• Illustrates the calculation of the final balance in 3 years for a $10,000 investment with a 10% rate of return and yearly compounding. 5. Amount to Invest: • Discusses the considerations for determining whether$1,000 is a good amount to invest, considering regular contributions and initial value.

By combining theoretical knowledge with practical application, I aim to empower individuals to make informed and strategic investment decisions using tools like the investment calculator.

References

Top Articles
Latest Posts
Article information

Author: Laurine Ryan

Last Updated:

Views: 6072

Rating: 4.7 / 5 (57 voted)

Author information

Name: Laurine Ryan

Birthday: 1994-12-23

Address: Suite 751 871 Lissette Throughway, West Kittie, NH 41603

Phone: +2366831109631

Job: Sales Producer

Hobby: Creative writing, Motor sports, Do it yourself, Skateboarding, Coffee roasting, Calligraphy, Stand-up comedy

Introduction: My name is Laurine Ryan, I am a adorable, fair, graceful, spotless, gorgeous, homely, cooperative person who loves writing and wants to share my knowledge and understanding with you.