This simple savings calculator can estimate how much will your investment account with monthly contribution grow and how much interest you can earn. Everything there is to know on how to save is presented below the application form.
How can this simple savings calculator help?
This personal finance tool helps you simulate the growth of your account no matter of its type (retirement, college or simple savings account) in case you analyze the opportunity to place a deposit with monthly compound interest and with regular contributions at the end of each month.
The data you should provide consist in starting principal you want to place, regular addition you can afford to save within the desired term and the assumed average annual interest rate the bank will offer. Please note that this savings calculator assumes that both your monthly addition and the return rate are constant during the term.
What is compound interest?
First of all, if you do have some money then you should take care of them and deposit with a catchy return rate. Second of all, you should look for a financial plan that meets your needs taking into consideration the use of a compound interest. Let’s explain a bit this financial concept: it 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 accumulated previously.
There are a few compounding types: monthly quarterly, semiannually or annually. Here is an example that could come in handy.
For a deposit of $100 with a monthly interest rate of 1%, after the first month you get 1$ interest added to your 100$. That means your new deposit is $101. After another month, the interest of 1% calculated from your $101 deposit will be $1.01 so the money you now have in the bank are $102.01.
In comparison to the simple linear interest, with the compound interest your money increases at an exponential rate which means a more rapid way of growth for your account.
How is the compound interest with monthly contributions calculated?
Let’s explain by a practical calculation. Assuming that you have an account with starting balance in which you want to contribute at the beginning of each month. The compound interest for the deposit is being paid at the end of each month. The question is how much will I get at the end of a year from that account?
So, for an account with a starting principal of $100, an annual investments return rate of 3% and a monthly addition of $10 this calculator combines the two compound interest formulas presented in the next lines.
- Capital Accumulation Formula: FV = ( (1 + i)n ) * PV
- Future Value of a Series Formula: FV = PMT * ( ( (1 + i)n - 1) / i )
FV = Future Value( the total you will get from the account)
PV = Present Value (Initial Deposit)
PMT = Periodic Payment Amount
i = interest rate per period
n = number of periods
Coming back to our example:
- FV = will be the answer we will get below
- PV = $100
- PMT = $10
- i = 3%
- n = 12
FV = (Capital Accumulation Formula) + (Future Value of a Series)
FV = ( ( (1 + i)n ) * PV ) + ( PMT * ( ( (1 + i)n - 1) / i ) )
FV = ( ( (1 + 0.0025)12 ) * 100 ) + ( 10 * ( ( (1 + 0.0025)12 - 1) / 0.0025 ) )
FV = ( 1.0304159 * 100 ) + ( 10 * ( 0.0304159 / 0.0025) )
FV = 103.04159 + 121.6636
The answer is that the end balance will equal $224.71 at the end of the first year.
What to take account of when deciding your savings plan?
- Find the best rate of return on the market. Please note this depends as well on your desired term. Usually smaller banks tend to offer higher rates as they fight bigger/better ranked banks, this being the sing lest way to gain more clients. That is why before deciding where to place your money you only have to analyze the main competitors and smaller banks as well. Please remember as well that the longer the savings plan is the higher the chance to obtain a better offer from the financial institution you approach.
- Establish what is your target in terms of the amount you want to get at the end of the desired term and decide the appropriate monthly savings you can make, otherwise you may get surprised that your account growth is not the one you expect.
- Analyze your personal budget, which means you should have a clear image of your monthly stable revenues and which are your monthly standard expenses, because this way you can either discover that you can save even more or you can conclude that you cannot reach the desired level to contribute on a monthly basis.
- Once you know the annual return rate and how much you can contribute regularly you can decide on the right term to save.
The good part is that this savings calculator helps you simulate as many plans as you want, you just have to input the data and compare their results.
Why do you need to save?
Since today the tendency to spend all or most part of our income is even at higher levels than few years ago due to various reasons (objective or subjective) the opportunity to save is in more cases ignored. Still what is the importance in making savings and why do we really need to save? The answer is in the question as today the probability to have unexpected expenses or unwanted events in our life is even higher than before.
Let’s think that our expectations and needs increase over time and every need of expectation should be financed somehow. Here comes the importance of savings, which can ensure you that no matter happens in the future you will have the chance to deal with it. From this point of view there are two perspectives presented below by their importance that may explain why we do need to save:
- First is that we do not know what future brings as such at every moment savings can help us deal with health, accidents or family problems, unwanted events or expenses we may need to finance. From this perspective savings are seen as a security measure that may help mitigating the risk and/or impact of unwanted happenings. So, this is the first reason we all should start saving. Many people do the same mistake as they thing they cannot save too much or that much they think other save, which make them forget about any intention of saving. But the problem is that they should first decide they need to save. Even that may seem to be a joke, as a rule it is better to start saving $1 per month than not saving at all.
- Second is that we want to decide, influence or plan our future which means savings can help us reaching our goal or implementing our plan. From this perspective the savings are seen as the tool that is mandatory to plan something for the future. This is the second main reason we should save, otherwise all plans may fail.