There are basically two methods used to calculate an investment's rate of return. The first is the time value of money (TVM) method. This way states that a dollar invested today is worth more than a dollar in the future as a result of interest earned. For example, assume $50,000 was invested in stock ABC. Without adding any additional amounts, after 11 months its value grew to $53,338. The TVM method would calculate an investment interest rate of 7.07%. To achieve this sum, use a financial calculator, because it is not a simple percentage calculation.
Making Multiple Contributions
The second is the discounted cash flow (DCF) method. It is one of the investment decision-making tools used by large corporations to justify million-dollar projects. This method is appropriate to apply when additional amounts are added to the original investment amount. As an example, consider $30,000 invested in stock XYZ. This time, additional amounts of $500 were added to the original investment at the end of the second and third months. After 14 months, the investment grew to $33,618. The DCF method would calculate an investment interest rate of 7.01%. Again, this is not a simple mathematical equation and would best be achieved through a financial calculator.
Rewards of Determining Rates
By tracking the calculated rate on a regular basis, physicians would be able to ascertain if their investment is growing at the desired rate, if it is stagnant, or if it is declining. Depending on how the calculated values have been tracking, it may be necessary to modify the strategy to improve the investment performance. If a modification was already made, the calculated value could indicate whether an improvement was made or not. Thus, the ability to calculate the rate of interest is crucial in ensuring that the investment is growing steadily.
A physician does not need to be an expert in personal finance to perform the interest rate calculations on their own. All that is required is to know the basics of personal finance calculations and to have access to an easy-to-use yet powerful calculation tool. Take the time to learn how to effectively use these tools. Sources of information include the Web, learning centers, financial institutions, and financial advisors, especially in cases where tax implications are involved.
Elindoro S. Rodriguez II is a writer, presenter, and a seminar leader whose goal is to empower people to make informed financial decisions. An expert in the mathematics of personal finance, he published the book Control Your Personal Finances (Finance Solutions; 1999) and developed the PFS Software. Mr. Rodriguez welcomes questions or comments at email@example.com.