Understand the returns on investment

The goal of any investment is to get more money than you put in – the profit (or loss) you incur is your “return on investment”. And with compound returns, the longer you leave your money invested, the higher your potential returns could be.

To see how it works, check out the $ 5,000 Growth below. This graph shows how an initial investment could potentially grow, year over year, over 20 years at an annual rate of 8%. Note that this does not include any additional contributions at any time during the 20 year period.

Growth of $ 5,000 over 20 years

Calculate the growth of your investment

Now use the calculator below with your own numbers to get a feel for how your equity investments might grow over time. It may also be helpful to explore how much the initial investment might increase if you were to contribute an additional monthly or yearly amount.

How to use NerdWallet’s ROI Calculator:

  1. Enter an initial investment. If you have, say, $ 1,000 to invest now, include that amount here. If you don’t have an initial amount to invest now, you can enter $ 0.

  2. Enter your regular contributions. If you plan to invest a certain amount each month in your investment account (a strategy known as average purchase), include this amount after selecting the “monthly” option. Or, if you prefer to invest a lump sum once a year, choose “annually” and include your expected annual contribution. If you do not plan to make regular contributions, select either option and enter $ 0. Note: Although monthly contributions of $ 100 and an annual contribution of $ 1,200 appear to have the same result, this will generate different final balances. Why? Monthly contributions are compounded monthly rather than annually, and compounding at more frequent intervals results in higher growth over time.

  3. Choose how long your investment will grow. How long do you plan to keep your money invested? If you are investing in stocks, it is generally a good idea to stay invested for at least five years to withstand any post-purchase volatility.

  4. Enter your expected rate of return. For reference, the S&P 500 has a historical average annual total return of around 10%, not taking into account inflation. This doesn’t mean that you can expect 10% growth every year; you might experience a gain one year and a loss the next year. But if you keep your money invested for the long haul, the goal is for those gains and losses to spread out over time, ideally ending in the dark at the end of the investment period.

A note on total returns versus price returns

One thing to consider when calculating ROI: is it price return or total return?

The price return is simply the annualized change in the price of the stock or mutual fund. If you buy it for $ 50 and the price goes up to $ 75 in a year, the stock price goes up by 50%. If the next year the price closes at $ 60, the stock price drops 20% that year. If it closes at $ 65 in the third year, it is up 8.3%.

Total return takes into account regular cash payments from the investment, such as dividends. Over the past 30 years, the difference between the total return and the price return of the S&P 500 has been around two percentage points per year, on average.

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