Investment calculators are useful financial tools that can help investors estimate the future value of their investments based on variables like initial principal amount, expected rate of return, time horizon, etc. By inputting these variables, investors can model different investment scenarios to project potential returns. This allows for better planning and decision making when constructing investment portfolios.
In this article, we will demonstrate how to use investment calculators to find the future amount that results from a particular set of investment parameters. We will explain the key variables needed as inputs and walk through examples of using the time value of money formulas and investment calculator tools to project investment earnings over time. Properly using these resources can aid investors in mapping out their long-term financial growth.
Key variables needed for using investment calculator
The key variables needed to estimate future investment value using a financial calculator or time value of money formulas include:
– Initial principal amount (present value): The starting amount being invested today.
– Expected rate of return (interest rate): The assumed annual rate of return the investment is expected to generate, input as a percentage.
– Time horizon (number of periods): The total time the money remains invested, measured in years, months, etc.
– Frequency of compounding: How often interest accrues on the investment, e.g. monthly, quarterly, annually. More frequent compounding will increase future value.
– Additional regular contributions: Any extra periodic investments, besides initial principal.
By inputting values for these variables, we can use TVM equations or financial calculators to mathematically project the future value of the investments after the defined time period.
Examples of using investment calculator
Here are two examples of how an investment calculator can be used to find future investment value based on a defined set of inputs:
Example 1)
Initial investment: $10,000
Expected annual return: 7%
Time period: 20 years
No additional contributions
Using the future value of a lump sum formula the calculation is:
FV = PV x (1 + r)^t
Where:
PV = $10,000
r = 7%
t = 20 years
FV = $10,000 x (1 + 0.07)^20 = $38,697
Example 2)
Initial investment: $5,000
Expected annual return: 6%
Time period: 10 years
Additional annual contribution: $2,000
Using the future value of an annuity due formula, this calculates to $27,195 after 10 years.
So by plugging the needed variables into investment calculators or TVM formulas, investors can project potential portfolio growth over long periods. This aids planning for goals like retirement or college savings funding.
Investment calculators are useful tools for mapping the time value of money and estimating long horizon investment returns. By inputting key variables like principal amount, return rate and time period, investors can leverage these calculators to project portfolio value given certain investment assumptions.