When you invest, it is natural to wonder how much you can make over time. Whether just sold a property or an asset, or are reviewing your retirement portfolio, it’s recommended to gauge the growth of your capital. By adding a few details about your investment, you can quickly find out your annual rate of return to gauge the success of your investment. If you continue reading you can learn more about the different sources of returns and why you should always calculate your annual growth rate.
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What is the annual rate of return?
Annual rate of return refers to the percentage that an investment grows yearly.
is a broad term that can define many transactions. If you are like most people, you may already be an investor without really knowing it.
Typically, the first investment many individuals make is in real estate when they
buy their first home
. If you are currently a homeowner, you have already taken the first step to get ahead. When the time comes, and the property is sold, you can calculate your annual percentage rate from your profits.
Many people also make investments through their work. If you have an
employer-sponsored retirement plan
that you contribute to, you qualify as an investor. Your investment choices are pre-selected by the plan sponsor to take out any guesswork. The amount that your money grows each year is considered against your deposits to get a rate of return.
Annual percentage rate can be applied to other types of securities as well. This includes
, corporate bonds,
. Any time there is a movement of a security, there is a percentage of profit that is gained or lost. By measuring your profit against your investment, you can find out the annual percentage rate.
What are different types of returns?
Investments can provide different sources of returns. The type of the return you get will be influenced by the way the profit is made. How the security is structured can affect the kind of return you will collect too. Here, we will review some common types of investments and their returns.
are an excellent security to invest in. There are various workplace pension programs available such as
plans. You can allocate pre-tax income to the plan that is available, and
defer taxes until withdrawal
. Each program is tied to specific investments to help the funds grow faster. Once you retire, you can collect your earnings in the form of
Another good investment is through
into a corporation. When you
purchase a stock
, you buy a percentage of the company and become a shareholder. When the organization earns a profit after tax money gets distributed to shareholders in the form of
. Dividends are commonly issued as cash payments, but can also be shares of stocks or property relative to the shareholding.
Company shareholders (
) can also get returns in the form of
a return of capital
. When you sell off your stocks, a portion of what you receive is your initial investment, known as return of capital. If the shares increased in value since you bought them, you could profit from the sale. Thus, the proceeds from the sale of a security are called capital gains.
You can also invest your money into
differ from stocks in the way the security is structured. When you buy a bond, you are lending money to the bond issuer. You never purchase any part of the company or municipality that you are investing in, as you do with stocks. Instead, you provide a loan to the business or district. As a result, the funds you receive are considered interest payments.
differ slightly from what has already been described. If you’re selling your main home, you can exclude up to $250,000 of the gain from your income. You just have to own and live in the property for a minimum of two years, out of the five years leading up to the sale. Any earnings above that, or from
other properties you own
within that two-year period, are considered
Regardless of what type of return you receive, it’s essential to analyze the performance of your investment. You can easily see how the security is doing by finding its annual rate of return.
How is the annual rate of return calculated?
Annual rate of return is calculated using a mathematical formula. The formula is useful because it includes adjustments for
. By analyzing your rate of return, you can decide if the security meets your expectations. This comparison can be even more helpful if you have multiple investments to choose from.
To calculate annual percentage rate, you need some basic information. The figures required are the beginning and end value of your investment, and the period that you held the investment for. These variables can be arranged in the following format to get the
compound annual growth rate
Let’s try an example together. Consider a homeowner that bought a house in 2013. The original investment is valued at $127,500. In 2017, the individual sold the home for $210,000. What is the annual return rate on the investment? You might need an exponent calculator for this, so
CAGR= (210,000/127,500)^(1/4) – 1
Based on the calculations, this homeowner received a 13.4% annual return on their investment.
Using the calculator
The calculator is very straightforward to use and has many applications. It is designed to help you assess all types of investment earnings. You can use the system to see the returns on past or present securities. That means if you have invested in stocks, or are considering it, you can quickly find out what you would gain. Beyond that, you can use the calculator to analyze the returns on your retirement portfolio. If you are ready to sell your home, you can consider the market averages in your calculations. With your results, you can figure how to allocate your capital to get the most benefit.
All you need to get started is a little bit of information. Let’s review the details together.
. On the first line of the calculator, add your initial investment amount. This could be the amount you paid for the stocks, your home purchase price, or the first deposit to your retirement savings.
. Identify the date of your initial investment on line two of the calculator. You can use the calendar feature to make this input easier.
. On line three, select an end date. Use this to assess how securities have performed in the past or how a future investment might pan out.
. Add the final value of your earnings to the fourth line of the calculator. Make sure to include your initial investment and the compound interest in this figure.
. If you have invested any other funds after the start date, please add it to line five of the calculator. This variable is most applicable to savings accounts. Alternatively, if you purchased more securities since your initial investment, document it here.
. Finally, identify the frequency of the above-mention deposits/purchases by using the drop-down menu. Then, you can select if the deposits are made at the beginning of the period using the checkbox below.
. Please proceed to your results.
Once you have completed the questionnaire, you can view your results. Initially, you can see a smart summary to the right of the inputs. Here you can verify the period covered and any additional deposits to the investment. If any of this seems wrong, check the information you added to the calculator before proceeding.
Below the calculator inputs, you can find a prompt for your annual rate of return. This is the percentage that your initial investment grows each year. For a more detailed breakdown, please view the bar graph included in your report. The bar graph defines the amount of capital that went towards the initial investment in green. You can compare that to the sum of the periodic deposits in blue and the total future value in red.
With this information, you can better analyze your investment choices. If a previous investment performed well for you, you know that you are making rational decisions. However, if you are not satisfied with the returns, it may be good to explore other options.
If you found this page useful, you can promote us on social media by using the share feature. Remember to bookmark this page and save it to the home screen of your smartphone. That way, you can have instant access to this great tool. Any time an investment opportunity presents itself, plug in a few numbers to see what you might stand to gain.