Definition
An investment calculator helps you estimate the future value of your investments based on an initial amount, regular monthly contributions, and an expected annual return rate. It uses compound interest, meaning you earn returns not only on your initial principal but also on the accumulated interest from previous periods.
Formula
Where:
FV = Future value
P = Initial investment (principal)
PMT = Monthly contribution
r = Annual nominal interest rate (decimal)
n = Number of compounding periods per year (12 for monthly)
t = Number of years
Example
Suppose you invest $10,000 initially, add $500 per month, expect a 7% annual return compounded monthly, for 10 years.
P = $10,000, PMT = $500, r = 0.07, n = 12, t = 10
Future Value ≈ $10,000 × (1+0.07/12)120 + $500 × [((1+0.07/12)120 - 1) / (0.07/12)] = $96,624
Total contributions = $10,000 + ($500 × 120) = $70,000
Total gain = $26,624
Frequently Asked Questions
❓ What rate of return should I use?
Historically, the stock market averaged around 7-10% before inflation. For conservative estimates, use 5-6%. Past performance does not guarantee future results.
❓ How do monthly contributions affect growth?
Consistent monthly contributions significantly boost your final amount due to dollar-cost averaging and compound interest on each deposit.
❓ Is this calculator suitable for retirement planning?
Yes, you can use it to project retirement savings by entering your current savings, monthly contributions, years until retirement, and expected return.
❓ What does "compounded monthly" mean?
Interest is calculated and added to your balance every month. The more frequent the compounding, the faster your money grows.