Once you start earning you are advised to start investing to earn returns for your future financial goals. But the term often seems scary to most people. It is overwhelmingly confusing to know where should you invest, how much should you invest, and for how long should you invest.
Well to put it simply, investment is the process of getting more cash out than you put in initially. An investment calculator is the solution to your investment problems as it will help put a lot of the queries emerging in your mind to rest. It is a tool that helps you ascertain the amount you could possibly make over time.
Whether you are just getting started with making investments in Dubai or whether you are an already seasoned player in the field of investing, an investment calculator is your friend. It will help you as an investor to figure out how to meet your financial goals. It shows the initial investment you make along with the frequency of your contributions. It also depicts how risk tolerance can affect your investment.
Want to know more? Follow us as we guide you through the basics of investing and how an investment calculator works:
How does investing work?
Investing allows you to take that money that is sitting idle with you or the money you are not spending and put it to work to earn you gains. The money you invest in bonds and stocks is important for companies as well as governments to grow, all while it earns you profits in the form of compound interest. With time this interest adds up to make a nest egg of savings for you.
One does not necessarily have to research each individual company and indulge in buying and selling of bonds by themselves in order to become an investor. In fact, this approach is not the wisest if you want to become a pro at the investment game and earn consistent returns. This is where the brokers come in to help guide you through the maze of investing.
What is an investment calculator?
This calculator illustrates how much can a potential investment earn on the basis of the annual rate of return expected by you. The rate of return will further depend on whether the interest is compounded annually or monthly and this in turn depends on the frequency of the contributions made by you. Usually, an investment calculator assumes that an investor makes their contribution at the beginning of every period unless chosen otherwise.
The investment calculator can also help determine one of the several different variables concerning the investments with a fixed return rate. Let us see the different variables involved in investing:
The Variables Involved:
For an archetypal financial investment, there are four pivotal variables that make up any investment. They are-
- The Starting Amount: The starting amount is usually called the principal. This is the initial investment amount. For a practical investment purpose, it can be a large sum saved up for a house, an inheritance, or the buying price of a certain quantity of gold.
- The Additional Contribution: This additional contribution is popularly known as annuity payment in financial terminology. These are not necessary and investments can be made without them too. However, they are beneficial as any additional contribution made during the tenure of investment towards the principal will lead to additional accrued returns as well as a larger end amount.
- The End Amount: This is the amount you had hoped for when starting out with your initial investment. It is the amount you get at the end of the investment’s life.
- The Return Rate: This is the most important variable from the point of view of any investor. Superficially it appears to be nothing more than a plain percentage. But in reality, this is the number used to draw comparisons between the several different financial investments. It helps you choose the most attractive among those.
- The Length of Investment: As obvious from the name, it is the length of the investment’s life. Usually, the longer the tenure of the investment, the more risks are associated with it due to the uncertainties of the future. Generally, the more periods an investment is broken down into, the more compounded return is accrued by the investor. It also means greater rewards for investing.
How to use an Investment Calculator?
Most investment calculators have certain fixed categories that the investor needs to fill in to get an estimate of their returns on a future date. The following categories can be found in most calculators:
- Put your initial investment: Let us supposed you want to incest a sum of 1,000 today. So, put 1000 in this section. In case you are yet to make up your mind regarding how much you want to invest, you can also enter 0.
- Enter the regular contributions: In case you wish to invest a fixed amount into your investment account every month, you can put that amount in this section and then select the option of ‘monthly.’
If, however, you wish to invest a lump sum amount each year, you can choose ‘annually’ instead. Include your annual contribution alongside it. If on the other hand, you do not wish to make any contributions, you can choose either ‘monthly’ or ‘annually’ and put 0 in the amount section.
It is important to note that an annual contribution of 1200 and a monthly contribution of 100 seem like they should generate the same returns, but that is not the case. The end balance in both cases will be different because the annual contributions are compounded annually as opposed to monthly contributions that are compounded monthly and frequent compounding leads to more growth over a period of time.
- Select the duration of your investment on the Investment Calculator: This section is for you to put in the time period for which you wish to invest your money. If you are investing in the stock market, it is advisable to invest for longer durations to ride out any volatility you might encounter post-purchase.
- Choose your expected return rate: Loss and gain are a vital part of investing. Gaining 10 percent this year does not guarantee the growth of 10 percent each year. There can be gain or loss depending on several factors. But keeping your money invested for a longer duration will average out the gains and losses you encounter over time.
Different Types of Investments:
There are different ways you can invest your money to meet your financial requirements in the future. Listed below are some common ways to invest:
- Bonds: This mode of investment offers the best returns as opposed to a fixed deposit (FD) or a certificate of deposit (CD). Bonds are essentially debt instruments issued by companies and offer a high rate of interest. But you only receive the final value once the bond matures.
- Mutual Funds: These are an excellent long-term investment option and are quite affordable. A fund manager collects money from a bunch of potential investors and then further invests them in stocks, securities, and bonds, etc. In mutual funds there is comparatively less risk involved as the money is not invested in a single investment instrument but is spread across different companies.
- Stocks: The primary investment option in everyone’s mind, stocks are equity traded by different companies. Before you decide to invest in stocks, it is vital to do your research and analyse the current market trends based on the country’s economy as these are the most volatile investment instrument and are not meant for those unwilling to take risks.
- Real Estate: This is one of the best ways to invest your savings, especially if you live in a fast-growing economy like the UAE. The value of property in such an economy is only going to reach the skies.
- Deposit Accounts: These accounts like a fixed deposit (FD) in the bank are meant to offer high rates of return to their customers as opposed to a traditional savings account.
Benefits of an Investment Calculator:
- It is easy to use
- It lets you make an estimation of the amount you can make with your initial investment
- Investment calculator even represents the risk tolerance of your investment
- It allows you to compare your gains at different principal amounts and frequencies of contribution, allowing you to make an informed decision regarding your savings and how to invest them
The Bottom Line
Investment might seem like a complicated feat but with an investment calculator, you can easily conquer your fears and doubts. Remember, investments might be risky, but not investing is far more risky for those who want to accumulate some savings for their retirement or achieve their financial goals.