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To better understand your profits and losses, it helps to understand rates of return. The rate of return is essentially the percentage of growth that you're making on an investment.

If you need help figuring out your annual rate of return, try our easy-to-use calculator. All you have to do is add the starting value of your investment, along it's known (or estimated) future value and the time elapsed.

For those new to investing, check out our FAQ below and hopefully, you'll find that investing isn't too tough after all.

FREQUENTLY ASKED QUESTIONS


Why use an annual rate of return calculator?

Before we cover the formula for rate of return, there are a number of benefits to using our annual rate of return calculator.

1. It Shows You How You're Doing

If you're a person who has a few investments going at once, you may look at your overall growth and determine your success by how much all of your investments are earning you.

That is a fine way to look at your success, but if you want to optimize your results, you need to look inward and be critical of the decisions you're making. The only way to understand your habits in this way is to calculate your rate of return on each one.

Doing a regular analysis can help you pinpoint which investments might not be making money, or worse, losing money.

Having a clear understanding of what decisions you made, how much money they made or lost, and what you could do differently is essential if you want your money to grow.

2. You Can Monitor and Predict Outcomes

Depending on the investment you make, you may have someone telling you how great of a decision it will be, or how much money you're going to make. Those claims can be analyzed through the rate of return formula.

If someone tells you that your investment will have an end value three times what the beginning value was, and will get to that point in five years, you can plug those value into the formula and see where your investment should be at different intervals.

In this way you can verify the claims of others, allowing you to call them on the honesty of their claims. You can also see where your money should be growth-wise at different times to keep yourself in check.

What is a rate of return?

The rate of return is chiefly the amount of money that you receive or lose over a specific span of time.

It is the growth of your earnings in comparison to the value of your initial investment and is considered a gain when positive and a loss when negative. The end value is typically expressed in percentages and can be calculated using a relatively simple formula.

There are some variables, specific to the investment that may change the formula, one of them being the amount of time that passes between the start and end of the investment.

What is the formula for annual rate of return?

If you're looking to calculate the rate of return over specific amounts of time, there is a specific formula that you can use.

    Annual ROR= ((End value / beginning value) 1 / years invested - 1) x 100

You'll divide the ending value by the beginning value of the investment, then take that number and multiply it to the power of one over the number of years in question, then subtract one and multiply by 100.

Example

Your beginning value was $10 and your end value is $30. We would divide 30 by 10, getting 3. Then, let's say three years have passed to get to this point.

We would multiply 3 to the power of one-third. This is because one, over three (the number of years) is what we need to use in our equation.

When we subtract one, we get the number 0.442. When multiplied by 100 the percentage of return from our investment is 44% each year.

What is a reasonable rate of return?

Your rate of return can vary based on the type of investment, your risk level, and the current state of the economy.

Ultimately, only you can decide if a certain rate of return is reasonable or if it warrants an investment. A good investment will align with your goals and risk tolerance. Typically the more the investment compounds, the more money you make!

Remember, there may be a number of other factors that affect the end-value of your investment. You should never rush into a financial obligation or investment without carefully considering the pros and cons and making sure that you're doing a smart thing.

With that in mind, you can verify claims by plugging numbers into the rate of return formula, making sure that numbers are accurate. It is always better to look through, do the numbers yourself, and understand exactly what you are signing up for.

There's also a whole lot more to investing than the rate of return if you're looking to make the big bucks. It's best to be informed. And we recommend doing plenty of research.

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