Introduction
Calculating the return on investment (ROI) is a crucial part of any investment decision. ROI is the profit or loss you make on your investment relative to the amount of money you invested. Whether you’re investing in stocks, bonds, mutual funds, or any other investment vehicle, knowing your ROI can help you evaluate the performance of your investment and make informed decisions about where to put your money and how to invest in startups.
In this post, we’ll focus on how to calculate the percentage of return on investment on the future value of monthly investments. We’ll explore seven different methods you can use to calculate ROI, so you can choose the one that works best for you. By the end of this post, you’ll have a better understanding of how to calculate the percentage of return on your monthly investments, and you’ll be able to make more informed investment decisions.
1. Compound interest formula
Compound interest is a powerful concept that can help you understand how your investments will grow over time by understanding how to calculate the percentage of return on investment. The compound interest formula is a widely used method for calculating the future value of an investment that earns interest over time. This formula takes into account the principal amount, the interest rate, the compounding frequency, and the time period of the investment.
To calculate the ROI using the compound interest formula, you can use the following formula:
FV = P * (1 + r/n)^(nt)
where:
- FV is the future value of the investment
- P is the principal amount invested
- r is the annual interest rate as a decimal
- n is the number of times interest is compounded per year
- t is the number of years the investment is held
To calculate the ROI, you can use the following formula:
ROI = (FV – P) / P * 100
where:
- ROI is the return on investment as a percentage
- FV is the future value of the investment calculated using the compound interest formula
- P is the principal amount invested
2. Online ROI calculator
If you’re not comfortable using the compound interest formula or other financial calculators, you can use an online ROI calculator to determine your investment returns. These calculators are available for free on various websites and can help you calculate the future value of your investment and the ROI in just a few simple steps.
One popular online ROI calculator is the Investment Calculator available on the website of the US Securities and Exchange Commission (SEC). Here’s how to use it:
- Visit the SEC’s Investment Calculator website
- Enter the starting amount of your investment in the “Initial Investment” field
- Enter the monthly investment amount in the “Monthly Addition” field
- Enter the expected interest rate in the “Interest Rate” field
- Select the compounding frequency from the dropdown menu
- Enter the number of years you plan to hold your investment in the “Years to Grow” field
- Click on “Calculate”
The calculator will then display the future value of your investment and the total amount of money you invested. To calculate the ROI, you can subtract the total amount of money you invested from the future value of your investment, divide the result by the total amount of money you invested, and then multiply by 100 to get the ROI percentage.
3. Financial calculator
Another way to calculate the ROI of an investment is to use a financial calculator. Financial calculators are designed to handle complex financial calculations and can be especially useful when working with long-term investments.
One of the most popular financial calculators is the Texas Instruments BA II Plus. Here’s how to use it to calculate the ROI of an investment:
- Press the “CF” button to clear any previous calculations
- Enter the monthly investment amount as a negative number in the first cash flow, using the “PV” key (e.g., -1000)
- Enter the interest rate as a decimal in the “I/Y” field (e.g., 0.08 for 8%)
- Enter the number of years you plan to hold the investment in the “N” field (e.g., 10)
- Press the “CPT” button, then press the “FV” button to calculate the future value of the investment
- Write down the future value amount
- Press the “CF” button to clear the previous calculation
- Enter the total amount of money invested as a negative number in the first cash flow (e.g., -120000)
- Enter the future value amount as a positive number in the last cash flow (e.g., 186170.69)
- Enter the number of years you held the investment in the “N” field (e.g., 10)
- Press the “CPT” button, then press the “%” button to calculate the ROI as a percentage
4. Manual calculation using tables
Another method to calculate the ROI of an investment is to use tables. This method involves manually calculating the future value of the investment using a set of compound interest tables and then calculating the ROI based on the total amount invested.
Compound interest tables provide a quick reference for calculating the future value of an investment at different interest rates and time periods. The tables are available online or in financial textbooks.
Here’s how to use the compound interest tables to calculate the future value of an investment and the ROI:
- Locate the compound interest table that corresponds to the interest rate and compounding frequency of the investment
- Find the intersection of the time period and the interest rate in the table to get the factor for the future value
- Multiply the factor by the monthly investment amount to get the future value of the investment
- Subtract the total amount of money invested from the future value of the investment to get the total return
- Divide the total return by the total amount invested and multiply by 100 to get the ROI percentage
5. Using investment apps
Another method to calculate the ROI of an investment is to use investment apps. Many investment apps provide a range of tools to help investors track their investments and calculate their returns. Here’s how to use an investment app to calculate the ROI of an investment:
- Download and install an investment app on your smartphone or tablet
- Log in to the app and navigate to the section to track your investments
- Enter the details of your investment, including the monthly investment amount, interest rate, and the duration of the investment
- Save the investment details and wait for the app to calculate the future value of the investment
- Check the app for the ROI of the investment
6. Seeking professional advice
The final method for calculating the ROI of an investment is to seek professional advice from renowned financial advisor Tyke Invest. If you are unsure about how to calculate the ROI of your investment or have a complex investment portfolio, it may be best to consult with a financial advisor or investment professional. They can help you understand the risks and returns of your investments and provide guidance on how to calculate the ROI.
To seek professional advice, you can:
- Find a reputable financial advisor or investment professional in your area
- Schedule a consultation or meeting to discuss your investment portfolio and goals
- Provide the details of your investment, including the monthly investment amount, interest rate, and the duration of the investment
- Ask the advisor or professional to calculate the ROI of your investment and explain their methodology
- Consider their recommendations for how to improve your investment returns
Conclusion
Calculating the ROI of an investment is an important step for investors who want to understand the performance of their portfolio and make informed decisions about their investments. There are several methods for calculating the ROI of an investment, including using the compound interest formula, online ROI calculators, financial calculators, manual calculations using tables, investment apps, and seeking professional advice. Each method has its own advantages and disadvantages, and investors should choose the method that best suits their needs and investment goals.
By understanding how to calculate the ROI of an investment, investors can make better decisions about where to allocate their funds and how to maximize their returns while minimizing their risks. Whether you are a seasoned investor or just starting out, taking the time to calculate the ROI of your investments can help you achieve your financial goals and build a more secure financial future.
