Investing is a long game, measured in years. Understanding your return on investment (ROI) can help you achieve your goals. It all depends on your rate of return, your time horizon, taxes and a host of other factors. Use Forbes Advisor’s return on investment calculator to help plan your long-term investing strategy.
How to Use Our ROI Calculator
To get the most out of this ROI calculator, you’ll want to change the default inputs to reflect your financial situation and goals. Here are a few tips for some of the more complex fields in the calculator.
Use a Realistic Inflation Rate
Inflation is how much prices rise across the economy, eroding the purchasing power of your dollars over time. When you invest, you’re probably doing so at least in part to beat inflation and earn returns that help you maintain and grow your wealth.
The 2.9% default figure on this calculator is actually a pretty good average inflation estimate, and you might consider leaving it. Between 1925 to 2020, the Consumer Price Index (CPI), a common measure of U.S. inflation, rose 2.9% per year, on average. Just beware that some years see substantially more inflation, like 1980’s sky-high 13.5% rate.
Read more: Why Is Inflation Rising Right Now?
Input Your Income Tax Rate
This is the percentage of your income that goes to taxes each year. If you aren’t sure what tax bracket you’re in, you can find the federal guidelines here.
Keep in mind that for the sake of simplicity, this calculator assumes that you cash out your gains each year, creating taxable events that you must pay out at your current income tax rate.
Most investors, however, are investing for the long term and won’t realize these gains every year. This allows them to benefit from lower long-term capital gains tax rates when they hold their investments for at least a year.
Consider Adjusting Your Contributions for Inflation
To keep the effective value of your contribution consistent across the years, you may want to check the “Inflation Adjustment” box.
This will update your annual contributions to keep track with rising inflation, and it may help you paint a more realistic picture of your future investment’s worth. It’s also a valuable reminder that your investment contribution rate shouldn’t be static—you should revisit it each year to make sure you’re putting away enough to meet your goals.
Look at the Calculator Values after Inflation
Whatever your investment goal might be, you probably know the cost of the thing today. But you might be less familiar with how much your goal may cost you after years or decades of inflation.
That’s why it’s helpful to check the “Show Values After Inflation” box. This will show you if by your end date you would have enough purchasing power to accomplish your goal based on today’s prices. If the answer is no, you may want to adjust your contribution rate.
Compare Simple vs Compound Interest
Compound interest is the engine that powers your investment returns over time. With compound interest, the amount you earn each year grows can be reinvested in your account to help you earn more.
Here’s how that can work: Say you have $1,000 to invest and you expect to earn 10% returns on it each year. The first year you earn $100. But the next year you earn $110, to reflect your investment account’s new base balance of $1,100. Over 10 years, you’d accrue almost $2,600.
Simple interest is different. With simple interest, your returns are always based on the starting balance of your account. This is essentially assuming you took out your profits every year and spent them, which you might do under certain circumstances, like if you were investing for income in retirement. Otherwise, you’ll probably want to avoid this situation as it can drastically undercut your returns.
Continuing the example from above, with simple interest, you’d wind up with about $600 less than if you invested with compound interest after 10 years. That’s because every year, you’re earning the same $100 that you did the first year.
Positioning yourself to benefit from compound interest is why it’s important to leave your money alone once it’s invested.
What Is a Good ROI?
Good ROI can be a subjective measurement. Most investors want to at least beat inflation with their portfolio. However, in many cases, a good measure for ROI on stocks is if they are beating the broader stock market.
Since the S&P 500 is often used as a benchmark for the broader market, many investors hope to beat this index’s average annual return. The average annual return for the S&P 500, when adjusted for inflation, over the past five, 10 and 20 years is usually somewhere between 7.0% and 10.5%.
This means that if your portfolio is returning better than 10.5%, you have a good ROI.
Return on Investment Calculator FAQs
What is ROI?
ROI stands for return on investment. This number is used to determine the profitability of a given investment or basket of investments.
The goal of ROI is to determine the precise return of an investment given that investment’s cost.
How do you calculate ROI?
You can calculate ROI with the help of an investment calculator like the one we’ve provided above.
However, the general formula for ROI is the gain from the investment (GI) minus the cost of the investment (CI). Once this figure is determined, you divide it once again by the cost of the investment and multiply your answer by 100.
The formula can be written thus: [(GI-CI)/CI] x 100 = ROI.
How do I start investing?
To start investing, open a brokerage account or consider a robo-advisor. You’ll generally have to provide info like your name, age, address, Social Security number and income as well as connect a bank account. If you aren’t sure where to get started, check out our lists of the best brokerages and best investment apps.
How much money do I need to start investing?
Once upon a time, you needed a big bankroll to start investing. That’s no longer true, and nowadays you can start investing with as little as a few dollars. If you’re going to start with small amounts, you may be best served by a robo-advisor or investment app, though traditional brokerages like Charles Schwab and Fidelity now allow you to buy fractional shares of many stocks and exchange-traded funds (ETFs).
What goals should I invest for?
You can invest for pretty much any goal, from a home down payment to retirement. That said, experts recommend investing for longer-term goals to avoid having to withdraw your money when the market is experiencing any short-term dips. That’s a bigger risk if you invested to fund a goal you hoped to accomplish in less than three years.
Historically, the stock market has recovered from every downturn it’s experienced; it just may take it anywhere from a couple of months to a couple of years to recoup its losses. If you don’t have that time to wait, you’ll likely be better off with a high-yield savings account or certificate of deposit (CD).
What kind of investment account do I need?
There are different investment accounts that can help you save for different types of goals.
• If you’re saving for retirement, you’ll be best served by an individual retirement account (IRA) or a workplace retirement plan, like a 401(k).
• If your goal is to prepare for a child’s college education, you may want a 529 account.
• If you’re trying to save for a shorter-to-mid-term goal (or you just want to build wealth in general and you’ve already maxed out your retirement accounts), you might opt for a taxable investment account.
What should I invest in?
Financial advisors typically recommend people invest in low-cost, diversified investments, like index funds and ETFs. These provide exposure to hundreds (or thousands) of individual investments, which helps you avoid putting all of your financial eggs in one basket while benefiting from the historic returns of the U.S. stock market.
