How can a compounding calculator help you work towards your financial goals?

Working towards your financial goals involves meticulous planning. The first part of the process involves setting a goal amount and defining the timeline. Next, you need to determine how much you need to save or invest and how you should do so.

Manually doing such a calculation can be challenging. This is where a compounding calculator can help. This free online tool can help you understand how your money can potentially grow over the long term. This can help you plan your investments better.

• Table of contents

1. Using a compounding calculator for financial planning
2. Step-by-step guide on using a compounding calculator

Using a compounding calculator for financial planning

Financial planning can help you set realistic goals and form an effective strategy to achieve them. Dividing goals by time horizons – for example, long-term for retirement, mid-term for education and short-term for building an emergency corpus – can help you identify the right investment avenue for each.

However, it can be hard to determine how much you should invest, particularly because of the role of compounding on your investments. When the returns on an investment are reinvested, further returns accumulate on them and so on. This power of compounding can potentially have an exponential effect on your wealth. A compounding calculator can help you plan better by doing the maths for you.

The online tool shows you the potential future value of your investments based on different variables.

You can use the calculator to determine your investment amount based on the final corpus you need. You can also use it to determine the size of your potential corpus based on the amount you plan to invest. Such an analysis can help you determine whether your financial goals are attainable. If not, you can use this information to adjust your strategy.

A compounding calculator also allows you to compare different investment options. You can enter your investment amount, horizon, and the expected rate of return of different investment avenues, such as fixed deposits, equity mutual funds or debt mutual funds. Based on the results, you can assess which avenue best suits your goals. However, it is important to note that investment vehicles with a higher return potential also carry high risk. Moreover, mutual fund investments are subject to market risk and past performance may not be sustained in the future. So, the decision of where to invest should depend not just on the return potential but also your risk appetite and investment horizon.

Step-by-step guide on using a compounding calculator

Step 1: Access a compounding calculator

There are many free compounding calculators available online, such as the Bajaj Finserv AMC Compounding Calculator.

Step 2: Enter the values

• Principal amount: Enter the initial amount you plan to invest. This could be the current value of your investment portfolio or the amount you are considering investing for the first time.
• Assumed rate of return: Enter the annual interest rate or return rate you expect to earn on your investment. This could be the average historical returns of your chosen investment vehicle. Please note that past performance does not predict future returns. Also, the rate of return will not stay fixed throughout the investment period and may go up or down based on market conditions.
• Period: Enter the length of time you plan to hold the investment before withdrawing funds or reaching your financial goal.
• Compounding interval: Enter the compounding interval of your investment: monthly, quarterly, half-yearly or yearly. The compounding interval is the frequency at which the interest/return is added to the principal amount in an investment or loan. Based on these inputs, the compounding calculator will show you the potential future value of your investment. To explore different scenarios, you can adjust the input values.

Conclusion

Long-term financial planning is not a one-size-fits-all process. It must be customized to your needs and altered over time. By understanding the power of compounding through a compounding calculator, you can create a detailed financial plan. In this way, you can use a compounding calculator to achieve financial goals potentially.

FAQs:

Do systematic investment plans (SIPs) work on compound interest?

Yes. Each SIP installment starts earning returns and subsequent returns are generated on it during the investment period. Your money has the potential to grow significantly over time with the power of compounding.

How to use a compounding calculator to achieve my future goal?

Compounding calculator won’t help you achieve your goals, but it could help you build a more precise plan to work towards them. Enter your principal amount, assumed rate of return, time period and compounding interval in the calculator to see the results. You can keep adjusting the values in the tool until you get the desired results.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.