Investment Calculator – Find Out How Much Interest You Can Earn Over Time

Setting aside money to invest so you can plan for a more secure financial future is smart living. This investment calculator can give you some direction on formulating your plan. You need to consider how much to invest up front, how much to save each year after you start, how long you want to do this, and how various factors will affect the amount of savings you are able to accumulate.

Some of those factors include inflation, taxes, your age, and your average annual rate of return. Use the investment calculator on this page to calculate how much money you can realistically expect to save over a pre-determined period of time.

For help filling out the calculator, knowing what to put in each field, and understanding the report it produces, use the definitions and explanations that follow.

Investment Returns Definitions

Use the definitions and explanations that follow for help as you fill out the investment calculator and begin creating your savings and investment plan.

Years

This is not your age. This field is for the number of years you plan to save and invest your money as you implement your plan. So, consider several factors. If you’re 40 years old, you might put ‘25’ in this field, because that would give your investment returns at age 65. If you’re 30 years old, you might put ‘35’ in this field.

But you don’t have to go with 65 as a goal age either. You could go for 75 or 85. Or maybe you plan to retire earlier at 55. It’s up to you. The idea here is, how long do you want to put your investment plan to work and see how much money you can save in that time? Use the years field to answer that question.

Rate of Return

This refers to your average annual compounded rate of return that you expect or hope to earn over the years of your plan.

What does ‘compounded’ mean? It means that your earnings from each year get added to your total balance, and the interest rate gets calculated based on that new total. So if you start with $50,000 and earn a 10% rate of return, you’d have $55,000 after one year. The next year, if you earned 10% again, compounding interest would now result in $5500 in growth, resulting in a new total of $60,500. That’s a compounding rate of return.

Realistically, there is no way to accurately fill in this field, because no one knows what will happen over the next few decades. Plus, rates of return constant change. Some years you might earn 10%, 20%, 30%, or even more. Other years, with situations like recessions, you might lose 30% or more.

The ‘average’ is not going to play out with a consistent percentage year after year. But since we’re trying to forecast at least an estimate of what we might be able to expect, you must pick something. Good estimates to use would probably be somewhere between 5-10%, assuming you plan to use the stock market for at least a portion of your portfolio.

If you want to stay out of the stock market, pick something a bit lower.

Initial Investment

How much are you starting with? If you have zero savings, then put $0. If you already have money saved somewhere, such as a bank account, and want to use that as seed money for your investment plan, then enter that amount as your initial investment. Or, perhaps you just got an inheritance and want to invest it for twenty years.

The initial investment is the amount of money you will begin with.

Additional Investments

Here is where the planning happens. How much do you want to contribute to your investment plan, and how often do you want to contribute it?

Begin by thinking about how much you want to save each year. If you’re using a Roth IRA or a 401k, you’ll be limited by contribution maximums. From 2023 and on, investors under 50 can contribute no more than $6500 per year to a Roth IRA. Investors over 50 can contribute $7500.

So if your investment plan is to utilize a Roth IRA, those would be your annual maximums. If you’re using another investment tool or more than one, your contributions can be higher.

Frequency of Contributions

How often do you want to contribute? If investing one annual lump sum, pick yearly. You could also contribute to your investment portfolio every month, every quarter, every week, or twice a month. Play around with this a bit and note how different contribution frequencies affect your compounding interest returns.

Inflation Rate

From 1925 through 2021, the average annual rate of inflation was 2.9%, so that’s probably a good figure to use, assuming you will be implementing your investment plan over at least a couple decades.

The record for the highest single year inflation rate happened in 1980, at 13.5%. 2022 also saw very high inflation. So, like your chosen rate of return percentage, there is no way to know for sure what will happen with inflation. But inflation rates don’t vary nearly as much, historically, as investment rates of return.

So, you can be pretty confident in choosing a number between 2-4%.

Tax Rate

For this investment calculator, the tax rate you enter here is assumed to be paid annually.

This is important because if you’re using an IRA – whether Roth or traditional – you will not pay any taxes annually. You will pay taxes when you withdraw from the traditional IRA, but that doesn’t begin until around the time you reach retirement. For most people using this investment calculator, for most of the years your plan is being implemented, you would pay zero taxes if using an IRA. The same applies to a 401k since those are also pre-tax contributions.

However, if you are using other investment vehicles such as equities or mutual funds not part of a retirement plan, then you will pay taxes each year in most cases. This gets complicated, and you may need help from a financial advisor to ensure you don’t needlessly lose money to excessive taxes.

Consider all this when selecting a tax rate.

Inflation Adjustment

If you want to keep ahead of inflation, you can check this box and then adjust your annual contributions so they keep up with inflation. For example, if you’re investing $10,000 for the first year, but assume an inflation rate of 3%, the next year you would want to save $10,300. Checking this box will adjust the calculations on the assumption you will adjust your contributions each year accordingly.

Now, if your plan utilizes only a retirement plan such as an IRA or 401k which has contribution limits, and if you expect to contribute the maximum from the start, then you would NOT want to check this box.

In other words, if you’ll be contributing $6500 per year for twenty years to a Roth IRA, that’s the maximum, which means you cannot increase those contributions to keep up with inflation. The only way to do that would be to save additional money somewhere else, which would complicate the math.

Show Values After Inflation

Check this box if you want to see your total returns in terms of purchasing power, including inflation.

Compound Interest

We talked about this earlier, but to restate, compound interest means interest gets calculated based upon your accumulated total account value, rather than the original amount and ongoing investments. As your account grows, assuming a consistent rate of return, your annual returns will get higher each year.

The compound interest includes just the interest calculated from other interest earned. Using our previous example of an initial $50,000 investment earning 10%, after one year you have $55,000. The next year you would have $60,500. That extra $500 is the compound interest.

When you click ‘View Report,’ you’ll see a graph with figures next to it reporting your compound interest and simple interest, as well as a chart estimating how much you would earn each time period.

Compounded Interest Return

The compounded interest return is the total amount of compound interest you would earn over the life of your plan, for the number of years you chose at the beginning. It grows bigger and bigger over time.

Simple Interest Return

The simple interest refers to the flat amount you earn based on your actual investments.

Let’s alter our previous example of an initial $50k investment to show how this works. Suppose that after your first year, you contribute another $5000 of your own money. After one year, you would thus have $60,000. That comes from the initial $50k, plus the $5000 in simple interest, plus the new $5000 contribution.

After the second year, assuming 10% interest again, you would now have $66,000, because 10% of $60k is $6000. $500 of that is compound interest, and $10,500 of that is simple interest ($5000 from year one, and $5500 from year two since you contributed another $5000).

Getting complicated? That’s okay – that’s why you’re using this investment calculator and not trying to do all this yourself!

Total Invested Capital

This refers to the total amount you have contributed yourself to your investment plan. In other words, if you earned zero interest and just stuffed this under your mattress, you would still have this amount.

If you start with $50,000 and contribute $5000 every year for 20 years, then after 20 years your total invested capital would be $150,000.

Investment Final Total

This is the number you came here for – it is the combined total of your invested capital, compounded interest, and simple interest. Put them altogether, and after the years you chose at the beginning are completed, this is how much money you will have saved, assuming your chosen rate of return holds true.

What Investing Does

Risk and Returns

As mentioned earlier, investing is never as simple as an investment calculator attempts to make it. Investment returns will change every year. You might earn 2% one year, 8% the next, -4.5% the next, and 20% the next. There is risk to investing, and generally, the greater the risk, the greater the potential reward. A conservative investment will never earn you 30% in a year, but it also won’t cost you 30% in losses.

So, you have to decide how much risk you’re willing to take in exchange for a potential return. Generally, financial advisors recommend a smart asset allocation that balances risk with return. That means using an array of higher risk and lower risk investments, combining them into a portfolio that will provide more stability over the long term. The closer you get to retirement, the more critical this becomes.

Starting Balance

Having a starting balance makes a big difference because it gives your investments an instant return. Play around with the investment calculator by putting in various starting balances and see how that affects your investment final total.

If you can seed your investment account with a starting balance, you’ll be giving yourself a great head start.

Contributions

Making regular contributions is also very important if you want to get the most out of your investment plan. Depending on your income, this amount can very widely from person to person. But even contributing just $100 each month will put you far ahead of where you would be if you just stash away a starting balance and hope it grows but never add to it yourself.

Again, the investment calculator will show how much impact even small but consistent investments will have on your long term rates of return.

Rate of Return

Rate of return changes every year as described earlier. Generally, if you’re planning for long-term investment growth, you should be able to weather occasional downturns as long as you have a smart asset allocation, meaning you aren’t overly invested in risky assets that might earn super high rates of return for a few years, but then produce nothing or lose big money later and then never recover.

The 2000 market crash serves as a great example of this, because certain big companies such as AOL and Enron imploded and never recovered. Investors overly invested in companies like those never made back their losses.

Years to Accumulate

When it comes to investing, time is usually on your side. The more years you have ahead of you, the more likely you can overcome temporary setbacks and experience rewarding long-term growth. If you’re already 55 and are using this investment calculator, your situation will be very different than a 25-year old looking to start saving for the future.

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