How to Calculate Savings & Investment

by C. Taylor

The calculation for savings or investments is essentially the same. The main difference is timing. Investments are often one-time monetary commitments that grow at a certain rate or return every year. Savings may be one-time deposits, but they are more often a series of regular, periodic deposits. Like investments, savings will grow at a given rate and compound monthly or annually. The same formula is applicable to both calculations, but you may find parts of the formula being zeroed out by inapplicability, such as the periodic deposit portion of a one-time investment.

1. Divide the annual interest rate by the number of compounding periods to calculate the interest per period. As an example, if your interest rate was 6 percent and compounded monthly, divide 0.06 by 12 to derive a monthly interest rate of 0.005. This also applies to some investment vehicles, such as government bonds. However, many investments, such as stocks, use an annual rate of return and do not need to be adjusted for compounding periods. In these cases, your annual rate of return is your "interest" rate, which compounds annually in this formula.

2. Multiply the number of periods per year by the length of the investment to calculate the total number of periods. In the example, if you wanted to know what your savings account would accrue at the end of the 10th year, you would multiply 12 times 10 to get 120. For annual rate of return investments, this figure would simply be the number of years.

3. Raise 1, plus the period interest rate, to the nth power, where n is the number of periods. Next, multiply by the original balance to calculate how much the original investment grew. If your savings or investment account does not periodically add more money, then this figure is your calculated savings or investment at the end of year 10. In the example, you would raise 1.005 to the 120th power, which gives you 1.8194. If you originally deposited $5,000 in your savings or investment account, it would grow to $9,097 by the end of the tenth year. If you don't plan on depositing any extra money in the account, then this is your total savings or investment. However, if you plan on adding periodic payments, you need to add those deposits and their subsequent interest.

4. Raise 1 plus the period interest rate to the nth power, where n is the number of periods, and then subtract 1 from this figure. In the example, raising 1.005 to the 120th power again gives you 1.8194. Next, subtract 1 to get 0.8194.

5. Multiply this figure times your periodic deposits and divide by the periodic interest rate. In the example, if you planned to add $200 every month, then you would multiply $200 times 0.8194 and divide by 0.005. This gives you a total 10th-year periodic deposit value of $32,776, inclusive of interest. If you do not plan to add any periodic deposits, then you would be multiplying by 0, which cancels out this portion of the formula.

6. Add this figure to the 10th-year original investment growth to calculate your total savings or investment at year 10. In the example, $32,776 plus $9,097 gives you a total of $41,873.

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