This monthly savings calculator estimates how much money including interest you could save in your account over time in case you contribute on a monthly basis, in order to help you make better financial decisions for your future. More on this topic you can read below the tool.
How does this monthly savings calculator work?
Since one of the most preferred methods to save is to deposit an initial amount and then add monthly contributions to it within the limits you can afford, this personal finance tool aims to help you calculate the growth of your investment account in which you place regular savings at the beginning of each month.
It takes account of the starting principal you want to deposit, regular monthly contribution you save, a desired term and an average annual interest rate and it applies the formulas presented in the next rows:
- Capital Accumulation Formula - for initial deposit: FV = ( (1 + i)n ) * PV
- Future Value of a Series Formula - for monthly contributions: FV = PMT * ( ( (1 + i)n+1 - (1+i)) / i )
- FV = Future Value( the total you will get at the end of the period)
- PV = Present Value( Initial Deposit)
- PMT = Periodic Payment Amount
- i = interest rate per period
- n = number of periods
Please remember that this monthly savings calculator assumes that both your monthly contribution and the rate of return are constant during the specified term and that your regular contributions take place at the beginning of each month.
What is compound interest?
The compound interest is the interest type in which the accumulated interest at a certain moment is added to the principal, such way that from the moment on, the return is calculated for both principal and the interest earned previously. Compared to the simple linear interest, the most important advantage it offers is that your money will increase at an exponential rate which translates into a more rapid growth of your account.
The most used compounding types are monthly, quarterly, semiannually and annually.
How is the compound interest with monthly contributions calculated?
Let’s take an example of an account with a starting principal of $100 with an annual return rate of 5% and a monthly addition of $10 for a year, applying the formulas presented above results the data:
- FV = will be final balance of your account at the end of the period.
- PV = $100
- PMT = $10
- i = 5%
- n = 12
Future Value = ( Capital Accumulation Formula ) + ( Future Value of a Series )
Future Value = ( ( (1 + i)n ) * PV ) + ( PMT * ( ( (1 + i)n+1 - (1+i)) / i ) )
Future Value = ( ( (1 + 0.0042)12 ) * 100 ) + ( 10 * ( ( (1 + 0.0042)12+1 - (1+0.0042)) / 0.0042 ) )
Future Value = ( 1.051581 * 100 ) + ( 10 * ( 0.051797 / 0.0042) )
Future Value = 105.1 + 123.3
Future Value = $228.4
At the end of the first year you will have in your account an amount equal to $228.4.
What interest type to choose?
Even though may seem difficult to calculate it is obvious that the compound interest is recommended instead of simple interest. That is why because over time the bigger the amount in your account is the bigger differences in interest earned will be compared to a linear interest. This is where our monthly savings calculator may came in handy as it allows you assess any savings plan without a piece of effort from your side.
How much do you really need to save?
The best response should take account of an entire list of factors that can be grouped in 3 main categories:
- your current capacity to finance unwanted & unhappy events or unexpected happenings in your life.
- your current capacity to finance your current needs and expectations;
- your current capacity to finance any future plans you may have.
Before detailing the two approaches on how much you really need to save we should speak about a basic rule that says you would rather try and prefer saving $1 a month rather than not saving at all. Coming back to the question, you can establish that by two different approaches:
- First approach says that you first need to establish a realistic goal in terms of how much you would like to get in your account after a certain time. Then, depending on this you can establish how much you need to save on a monthly basis.
- Second approach says that you first need to revise your personal budget, meaning that you need to know your total regular income and total expenses within a month, then you need to make the difference between them to find out how much you can actually save.
What else to take account when planning your savings goal?
The probability that your financial capacity and status to change over a certain time increases day by day as it depends on that many factors you can not control or predict entirely. For instance you set up your savings goal and a month later you lose your job? Will you still be able to keep your savings plan? Most probably not! That is why you should always keep an eye on few things such as:
- Protect as much as you can the income sources that are stable and take advantage of the ones that may constitute occasional or extra income sources, BUT do not risk losing your stable sources for secondary sources you cannot be sure about.
- Assess in an objective way your capacity to save on a monthly basis otherwise your plans may prove unrealistic.
- Rather set up a longer term to achieve your goal than to set up a higher level of monthly savings because is it a safer approach.
- Take account of inflation rate that affects your savings as such you need to be aware for instance of the fact that the $100,000 you want to achieve today will represent a significant smaller amount after a certain number of years.
- Take a pessimistic rather than optimistic average annual interest rate scenario; otherwise you risk making a calculation of your account growth that will then prove to be false.