Required Return Calculation
Calculate what interest rate you need to reach a financial goal. To grow $10,000 to $20,000 in 10 years requires 7.18% annual return. Formula is ((FV/PV)^(1/years) - 1) * 100. This helps assess whether goals are realistic - needing 25% returns is unrealistic, needing 6% is achievable with balanced portfolio.
Compare required rate to realistic investment returns. Savings accounts yield 1-5%, bonds 4-6%, diversified stock portfolio historically 10%, high-growth stocks potentially 15%+ but with significant volatility risk. If required rate exceeds what investments can realistically deliver, adjust goals or increase initial investment.
Consider risk tolerance when evaluating required returns. Higher returns require riskier investments. If you need 12% to reach goal but can't tolerate volatility, either invest more initially or extend timeline. Safe investments won't deliver high returns - align expectations with reality and risk capacity.
Quick Tips
- Always compare APR, not just interest rates
- Use the Rule of 72 to estimate doubling time
- Extra payments dramatically reduce total interest
Frequently Asked Questions
Depends on risk tolerance. Savings accounts: 1-5%, bonds: 4-6%, balanced portfolio (60% stocks/40% bonds): 7-9%, stock market: 10% historically. Past performance doesn't guarantee future results. Higher returns mean higher risk.
No. Only FDIC-insured savings and CDs guarantee returns (up to $250,000 insured). All investments carry risk. Bonds can default, stocks fluctuate, real estate markets decline. Diversification reduces but doesn't eliminate risk.
Significantly. If you earn 8% but pay 25% tax, after-tax return is 6%. Use tax-advantaged accounts (401k, IRA) to defer or eliminate taxes on investment gains. Calculate required pre-tax return based on after-tax goals.