What is Investment?
Investment, in its broadest sense, refers to the process of allocating resources, usually in the form of money, to acquire assets or items with the primary goal of generating income or appreciation in value. In an economic context, an investment is the purchase of goods that are not consumed today but used in the future to create wealth. In finance, investment means the acquisition of a financial asset or allocation of money with the expectation of generating income in the future or selling the asset at a higher price for profit.
Any benefit arising from an investment decision is called a return. Returns can take several forms, such as gains (or losses) realized from selling a particular asset or investment income in the form of dividends or interest. Investors generally expect higher returns from riskier investments, which means that return and risk are strongly interlinked. To reduce overall risk, it's often advisable to diversify a portfolio of assets. This calculator focuses prominently on financial investments that generate income in the form of annual returns or interest.
How to use Investment Calculator?
The investment calculator is a multifunctional tool that helps you make appropriate investment decisions based on the type of investment you're interested in. It allows you to estimate the final balance of your investment, taking into account initial balance, periodic contributions, interest rate, and duration of investment.
To use the investment calculator, follow the steps below:
Choose the subject you are interested in, such as final balance, initial balance, periodic contribution, investment duration, or required annual rate of return.
Enter the initial balance you start your investment with and the duration of your investment.
Decide if you'd like to include an inflation rate.
If you want to allocate additional money to your investment with a specific regularity, set the frequency, amount, timing, and growth rate of contributions if applicable.
Review the output information and charts for more details about your final balance, its composition, and the progression of your investment year by year.
An Actual Example to Demonstrate the Calculator
To illustrate how to use the investment calculator, let's go through a simple example:
Suppose you want to invest an initial amount of $10,000 for 10 years at an annual interest rate of 5%. You also plan to add an additional $2,000 to your investment every year. Additionally, you want to account for an average inflation rate of 2%.
Follow the steps below to use the investment calculator:
Choose "Final balance" as the subject of your interest.
Enter the initial investment amount of $10,000.
Set the investment duration to 10 years.
Include the inflation rate and input 2% as the average rate.
Select an annual frequency for additional contributions and input $2,000 as the amount to be added each year.
Choose the timing of the contribution (e.g., beginning or end of the period).
Decide if you want to set any growth rate for the sequence of contributions – in this case, we leave it at 0% since there's no mention of an increase in contributions over time.
After entering all the required information, the calculator will display the results, including the nominal and real final balance, annual growth rate, total amount of contributions, and respective share of the final balance.
You can also view a chart showing the breakdown of your final balance by components of the investment and the progression of your investment throughout its duration. This information can be valuable when assessing the performance and potential of your investment over time.
By using the investment calculator like in the example above, you can easily explore and optimize different investment strategies and find the one that best meets your financial goals.