How to Use an Investment Growth Calculator to Reach Your Savings Goals
There’s no shortage of advice when it comes to investing. Some people would call you smart for putting your money into a high-yield savings account. Others might claim you're throwing away extra cash if you're not diving into the stock market. So what is the best way to reach savings goals through investment? The answer depends on your individual situation — and there are tools to help you narrow down the right options. Using an investment growth calculator is an excellent way to compare investment options and figure out how much money you stand to make over time.
What Is an Investment Growth Calculator?
An investment growth calculator is a free online tool that, like its name suggests, can calculate how much money an investor potentially stands to gain from an investment over a period of years. Investment growth calculators offer an easy method for investors to compare the long-term benefits of multiple investment options.
They’re also ideal for meeting a number of needs. For example, they can help you understand how an investment you already own is expected to perform over time. They can also help you determine whether an investment you’re thinking of making might end up being profitable or not — thus guiding your decision about whether or not to invest. These tools ultimately put you in control by helping you examine the facts independent of all the persuasive techniques often associated with people and businesses that sell investment products.
How to Use an Investment Growth Calculator
Various investment and finance websites typically offer their own investment calculators you can use. While they may differ slightly, there are some common numbers and other elements that investment growth calculators utilize:
Starting Balance: This number is sometimes called the initial investment, and it’s the sum of money that you’re planning to invest at the outset. If you’re investing in a savings account, the starting balance will be the amount of money you’ll put in the account when you open it. If you’re investing in a property, on the other hand, this would be its purchase price.
Contributions: Many types of investments, such as retirement accounts and similar financial products that require you to deposit money into them, grow much faster when you contribute to them regularly. You’ll need to decide how much money you want to invest beyond the starting balance — and how often. Investment calculators often have options to choose whether you’ll make more deposits on an annual or monthly basis.
Rate of Return: This is the percentage of gain that you hope to make each year on the investment. In other words, this is the amount of interest you can expect to make for investing your money in a certain financial instrument. For a savings account or certificate of deposit, this will be a set annual percentage rate (APR). For a stock account or investment in a business, this will be an estimated percentage.
Years to Accumulate: This is the number of years you expect to continue investing in the asset.
An investment growth calculator synthesizes the data you input to calculate the predicted worth of the investment at the end of the time period you specify. The final number shows the sum of the initial deposit, planned deposits and all interest you may earn. This allows you to see how much money you can make through a particular type of investment.
For example, suppose you open up a high-yield savings account with an APR of 1%. Upon opening the account, you deposit $1,000, and you plan to deposit $200 more each month. You want to use an investment calculator to find out how much you stand to earn after doing this regularly for five years.
What information do you need to plug into the investment calculator? Your starting balance is $1,000. Your monthly contributions are $200. The rate of return is 1%, and you’ll let your investment accumulate for five years. After running these details through the calculator, you should have an amount that represents your APR earnings after the five-year period is up.
Find the Right Information to Accurately Estimate Growth
The techie idiom "garbage in, garbage out" rings true with investment calculators — meaning you need to input the most accurate details possible to get the most accurate calculations possible. If you want to see accurate figures, you need to do research to find the most reasonable rate of return. In some types of investments, the rate of return is a fixed rate published by a financial institution. If that’s the case, you’ll simply need to find this number and plug it into the calculator.
In other cases, such as investing in real estate or businesses, you’ll need to estimate a rate of return. That’s because outside forces, such as the housing market, play a role in influencing the value and it’s not as predictable or steady over time. Although the figure may or may not be an accurate reflection of current events, careful research to find a reasonable estimate can produce a much more accurate number.
You should also be honest with yourself about the contributions you plan to make; it can be easy to get idealistic about investing because you want to see your money grow, but it’s vital to be realistic. The results of the investment growth calculator are most accurate if you enter what you can reasonably contribute, not what you wish to contribute. If you’re not already used to setting aside $500 a month into a savings account for emergencies, for example, suddenly contributing $500 into the stock market each month may be an unrealistic goal.
Reaching Your Savings Goals
As noted, there are plenty of ways you can invest savings or normal earnings on a regular basis. When it comes to savings accounts, you might choose regular savings accounts, high-yield savings accounts or certificates of deposit. When it comes to stocks, you can invest in companies, natural resources indexes or FOREX, to name a few options. You can also spend money on businesses or real estate. Many people even invest in cryptocurrencies.
To determine the best place to invest your money, you need to get an accurate picture of how profitable the investment will be. Investment growth calculators allow you to compare apples to oranges. There are plenty of differences between investing in cryptocurrency, real estate, government bonds and the latest, greatest IPO, and a calculator can help you evaluate each based on its potential to earn you money.
That said, it’s also worth it to discuss your situation with a financial advisor or planner. They can help you get a more realistic assessment of your current financial situation and can let you know, based on your lifestyle, which types of investments may be better for you. An advisor can also help you determine and set financial goals, along with the necessary steps to reach them. Take a look at some options first using an investment calculator, and then consider meeting with a professional who can set you on the right course to manage your investments successfully.