A Savings Calculator is a tool that can give you an idea of the amount of money you would have in the future based on your current savings habits. It gives you feedback on your deposits made on a wide range of periods that can be daily, weekly, twice a week, fortnightly, monthly, once in two months, quarterly, once in six months, and annually. You have to run the calculator against the annual interest rate you are being offered along with the initial investment, the number of years you want to deposit (the maturity period), and the recurring deposit amount which can be set to a series of periods stated above.
The Savings Calculator is a part of a broader set of calculators that include the Salary Calculator and Pay Raise Calculator. You can get a complete list of the calculators offered by clicking on this link.
Let us take a look at how Personal Savings is calculated, which is what the calculator helps you achieve.
How To Calculate The Personal Savings After A Fixed Period?
First, let us take a look at the various parameters involved in the calculation and then look at a simple example to understand how the calculator does the calculation.
Years To Invest
The years to invest is sometimes also referred to as the maturity period. It is the duration of the time you intend to continue to deposit your money based on a period in the unit of years. The higher the number of years you continue to invest, the higher the interest you earn after the maturity period or years to invest.
Ideally, most investments start with an initial investment, followed by regular deposits of different periods ranging from daily, weekly to semi-annually, and annually. It is sometimes also referred to as a lump sum. It is essentially a one-time deposit, usually a large amount, as opposed to the recurring deposits smaller in number. For example, an initial investment could be 10000 dollars, followed by a monthly deposit of 200 dollars.
The deposit amount is the regular deposits you make based on specific periods. As stated previously, this can be daily, weekly, bi-weekly, semi-monthly, monthly, bi-monthly, quarterly, semi-annually, and annually. It is sometimes referred to as a recurring deposit, which refers to the fact that deposits are made regularly over some time. It would be best if you aimed to deposit a higher amount and choose a shorter period and make more deposits, which will fetch a higher interest in the long run. For example, making a monthly deposit of 200 dollars at an annual interest rate of 4% and an investment initially of 10,000 dollars for one year fetches an interest of $451.91.
On the other hand, using the same initial investment of 10,000 dollars, at an annual interest rate of 4%, and a yearly deposit of 2400 dollars, the interest earned after a year is only 33.33 dollars. Although 200 dollars per month translates to 2400 dollars per year, the monthly recurring deposits fetch a more substantial interest in the longer run. Hence, it would be best if you tried to make more frequent deposits for the maximum possible benefit.
Expected Annual Interest Rate
The expected annual interest rate is the fixed percentage by which your money grows on your recurring deposit. The calculation is not as simple as summing up the initial investment and total recurring deposit over some time and multiplying this by the expected annual interest rate. Fortunately, the Personal Savings Calculator does all the heavy lifting for you. You have to plug in the required parameters and get an idea of the interest that your investment generates over some time. You should find a deposit source offering a higher annual interest rate, as this would fetch a higher interest amount.
Another thing to keep in mind is that the interest rates are always calculated on a per-year basis. As an example, for an initial investment of 10000 dollars for one year and a 200 dollars monthly deposit at an expected annual interest rate of 5%, the interest generated is 567.39 dollars. And for the same investment but at an annual interest rate of 4%, the interest generated is 451.91 dollars. It’s visible that a higher interest rate offers a much better return on investment.
The deposit frequency refers to the regular periods over which the deposits are made. As stated previously, deposits can be made over a variety of periods, such as weekly, weekly, bi-weekly, semi-monthly, monthly, bi-monthly, quarterly, semi-annually, and annually. For example, a weekly deposit of 10 dollars over one year, an initial investment of 10,000 dollars, and an annual rate of 4% can fetch your interest of around 1935 dollars. Whereas the same investment monthly, which roughly translates to 40 dollars a month, brings interest of 416.31 dollars. Investing more frequently leads to much more considerable interest accumulation.
Value After X Years
The calculator also outputs the final value of your investment, which is the total investment plus the interest accumulated.
The calculator also outputs the total investments you have made. It is the sum of the initial investment plus the recurring deposits you have made over a chosen time. For example, if you have made an initial investment of 10,000 dollars and a monthly deposit of 200 dollars over one year, the total invested amount is 10000 + 200*(12). There are 12 months in a year, and since you are making a monthly deposit of 200 dollars in one year, the amount invested would be 200*12, which is 2400 dollars. It is added to the initial investment to get a total of 12400 dollars for this particular example.
The interest Earned is the main output returned by the calculator. For a given initial investment or lump sum, a period in the format of the number of years, an annual interest rate, and a recurring deposit that can be made over several frequencies, the calculator outputs the interest earned. Let us take a look at how the calculator does this.
Let’s say that you have an initial investment of 10,000 dollars. The number of years to invest in one year, and the monthly deposit frequency is at an annual interest rate of 4%. The monthly deposit is 200 dollars, and the interest is calculated by compounding yearly. The calculation is done as follows.
Since the initial investment is 10,000 dollars and compounded for one year at a 4% rate, it yields a value of 10407 at the end of a year. It is calculated by using Initial investment multiplied by one plus the Annual Interest Rate to the power of the number of years, which is 10000*(1 + 0.04)^1. We also have to factor in the monthly deposit of 200 dollars. Since the interest is compounded annually, the first monthly deposit is for 11 months, and the second installment is for ten months, and so on. For each monthly installment, the interest calculation is done by multiplying the monthly investment by one plus the Annual Interest Rate to the power of the number of months divided by 12. It is done as the monthly deposits do not exist for the entire year.
Therefore, the result is: 200*(1 + 0.04)^(x/12) where x ranges from 1 to 11. Summing up the output yielded by the initial investment and the outputs yielded by every monthly installment, we get the total value after one year to be 12851.91 dollars. It is essentially an interest return of 451.91 dollars.
If you are not a fan of numbers and the above calculations seem daunting, you don’t have to worry about it. All you have to do is input the required fields, and the calculator does the rest for you.
The Personal Savings Calculator does the job of calculating the interest generated on your savings easily, even if you are not a math wizard! We are sure that this information will go a long way in helping you make the correct decision on how to approach savings.