CAGR Calculator (Compound Annual Growth Rate%)

| Added in Personal Finance

What is CAGR and why should you care?

Do you often wonder how well your investments are really doing over time? Enter the Compound Annual Growth Rate or CAGR! It's like the golden rule of thumb for understanding your investment's annual growth rate, providing a smoothed-out figure that transcends all those pesky ups and downs in your portfolio.

So, why should you care? Well, knowing your CAGR helps to simplify the complex world of investment performance. Whether you're comparing different investment options, or just trying to understand how well your current assets are doing, CAGR breaks it down so even your grandma could get it. Oh, and did we mention it also helps assess how inflation affects your investments? Yeah, it's that versatile!

How to calculate CAGR

You don't need to be Einstein to calculate CAGR. Once you grasp the formula, it's as straightforward as pie. Here's the fundamental formula you'll be working with:

[
FV = IV \cdot \left(1 + \frac{\left(\frac{CAGR}{100}\right)}{m}\right) ^ {m \cdot t}
]

Where:

  • FV is the final value
  • IV is the initial value
  • CAGR is the compound annual growth rate (in percentage)
  • m is the compounding frequency (e.g., yearly is 1, monthly is 12, daily is 365)
  • t is the total time invested (in years)

Now, let's reverse engineer that to find CAGR when you know the initial and final values:

[
CAGR = \left(\frac{FV}{IV}\right)^{\frac{1}{t}} - 1
]

Where:

  • FV is the final value
  • IV is the initial value
  • t is the total time invested (in years)

Make sure you multiply your final answer by 100 to get the percentage. See? Easy peasy!

Calculation Example

Alright, enough with the formulas. Let's dive into a real-world scenario!

Imagine you invested $5,000 in a tech startup. Fast forward 8 years, and that investment has ballooned to $12,000. Curious about the CAGR? Let's break it down using our formula:

Initial Value (IV): $5,000

Final Value (FV): $12,000

Number of Years (t): 8

Plug these into the CAGR formula:

[
CAGR = \left(\frac{12,000}{5,000}\right)^{\frac{1}{8}} - 1
]

Do the math:

[
CAGR = \left(2.4\right)^{\frac{1}{8}} - 1 \approx 0.1156
]

Multiply by 100 to get the percentage:

[
CAGR \approx 11.56%
]

Boom! Your investment grew by an average annual rate of approximately 11.56%.

Don't you just love numbers? Now you're equipped to calculate the CAGR for any investment you have lying around, giving you clear insight into your financial growth and helping you make more informed investment decisions.

So, what's stopping you? Grab a calculator and see how your assets have been performing over the years!

Frequently Asked Questions

CAGR (Compound Annual Growth Rate) is a measure of the mean annual growth rate of an investment over a specified period longer than one year. It provides a smoothed annual rate that eliminates the volatility of year-to-year returns, making it easier to compare different investments or understand how well your assets are performing. CAGR is particularly useful for assessing long-term investment performance and understanding how inflation affects your investments.

CAGR is calculated using the formula: CAGR = (Final Value / Initial Value)^(1/Number of Years) - 1, then multiplied by 100 to get a percentage. This formula takes the ratio of ending to beginning value, raises it to the power of 1 divided by the number of years, subtracts 1, and converts to a percentage.

Use CAGR when you want to compare the performance of different investments over the same or different time periods, evaluate the historical performance of a portfolio, or understand the average annual return of an investment that has fluctuated over time. It''s especially valuable for comparing investments with different volatilities or time horizons.

CAGR assumes a constant rate of growth over the entire period, which doesn't reflect actual year-to-year volatility. It doesn't account for risk, cash flows during the period (like dividends or contributions), or the timing of gains and losses. CAGR is best used alongside other metrics for a complete picture of investment performance.