Compound Annual Growth Rate or CAGR is a particularly useful calculation for understanding the true return on your investment over a period of time.
Most people are familiar with APR (Annual Percentage Rate) and Interest Rate illustrations. When investing your money, particularly across a broad portfolio, it is important to understand how much interest you are really achieving.
Let's consider a $1000.00 investment in the stock market. The Stock Market is a particularly volatile investment arena as fluctuations on the investment can be huge which makes it difficult to understand how much interest you are really achieving. So, back to our example, Nancy decides to invest $1,000.00 in the Stock market. She continues to dabble in stocks and shares and, after 3 years, she has $1,150.00 in her stock market portfolio. Nancy thinks she has done well but isn't sure how the stock market compared to say, investing in a short term bond.
Nancy is a clever cookie, she enters her investment and return details into the CAGR calculator which tells her that during her 3 year investment in the stock market, she received a compound annual growth rate (CAGR) of 4.76%. Nancy is a very happy lady as the bond she was looking at would have paid out at 4% so she would have earned less by investing in the bond.
Clearly Nancy is functional and stock market investments aren't always a great bet, sure its great to risk some money on a good return but make sue it's not a gamble with all your savings. There is a lot to be said for low risk fixed returns... Though, to stay fair to stock market brokers, there can be a lot said for Stock Market investments too, just think carefully.
|Compound Annual Growth Rate = 0.00%|
Tip: If you are thinking of investing in the stock market, why not see if you can free up some of your existing cash by reviewing your daily spending with our Daily Expense Savings Calculator, this way you can leave your existing savings where they are and start to make that money you spend on the daily donut or bagel start paying for the high roller lifestyle! Well, maybe not but at least it's a safer way of learning the stock market and a few less donuts is good for you!