Author Topic: Basic question about compound interest on accounts  (Read 2149 times)

MVal

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Basic question about compound interest on accounts
« on: October 14, 2016, 08:35:48 AM »
When I use those online compound interest calculators to estimate the value of my NW over time, they always ask if you are compounding monthly or yearly. How do I find out with my 401K, Roth, etc., which way they are compounded? Are they generally compounded one way or another, usually?

nereo

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Re: Basic question about compound interest on accounts
« Reply #1 on: October 14, 2016, 08:47:11 AM »
When I use those online compound interest calculators to estimate the value of my NW over time, they always ask if you are compounding monthly or yearly. How do I find out with my 401K, Roth, etc., which way they are compounded? Are they generally compounded one way or another, usually?

Those calculators are just giving you ballpark estimates based on your mathematical inputs.
IRL what you'll experience is wide swings in your portfolio as the markets go up and down (assuming you have most of your assets in equities - either index/mutual funds or individual stocks). Even if you carry bonds your yields will change month-to-month.  Most stocks will also pay our dividends quarterly

in other words, when using those calculators for predicting how much money you will have in "x" years tehre's no "best" way.  They are more accurately used if you have a debt to someone (or they have a debt with you) and you want to calculate how much is owed.  For most debts (mortgages, credit cards, etc) debt is compounded monthly.

MVal

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Re: Basic question about compound interest on accounts
« Reply #2 on: October 14, 2016, 09:06:45 AM »
When I use those online compound interest calculators to estimate the value of my NW over time, they always ask if you are compounding monthly or yearly. How do I find out with my 401K, Roth, etc., which way they are compounded? Are they generally compounded one way or another, usually?

Those calculators are just giving you ballpark estimates based on your mathematical inputs.
IRL what you'll experience is wide swings in your portfolio as the markets go up and down (assuming you have most of your assets in equities - either index/mutual funds or individual stocks). Even if you carry bonds your yields will change month-to-month.  Most stocks will also pay our dividends quarterly

in other words, when using those calculators for predicting how much money you will have in "x" years tehre's no "best" way.  They are more accurately used if you have a debt to someone (or they have a debt with you) and you want to calculate how much is owed.  For most debts (mortgages, credit cards, etc) debt is compounded monthly.

Yes, I knew they were pretty rough approximations. Do you know of any better ways to calculate how much money I might have in a certain number of years? I'd like to play around with figuring out when I might be able to FIRE. I know there's that FIRE calc thing, but it seems really complicated.

nereo

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Re: Basic question about compound interest on accounts
« Reply #3 on: October 14, 2016, 10:54:50 AM »
When I use those online compound interest calculators to estimate the value of my NW over time, they always ask if you are compounding monthly or yearly. How do I find out with my 401K, Roth, etc., which way they are compounded? Are they generally compounded one way or another, usually?

Those calculators are just giving you ballpark estimates based on your mathematical inputs.
IRL what you'll experience is wide swings in your portfolio as the markets go up and down (assuming you have most of your assets in equities - either index/mutual funds or individual stocks). Even if you carry bonds your yields will change month-to-month.  Most stocks will also pay our dividends quarterly

in other words, when using those calculators for predicting how much money you will have in "x" years tehre's no "best" way.  They are more accurately used if you have a debt to someone (or they have a debt with you) and you want to calculate how much is owed.  For most debts (mortgages, credit cards, etc) debt is compounded monthly.

Yes, I knew they were pretty rough approximations. Do you know of any better ways to calculate how much money I might have in a certain number of years? I'd like to play around with figuring out when I might be able to FIRE. I know there's that FIRE calc thing, but it seems really complicated.
well, FIRE calc and cfiresim are two of the best calculators out there that use real historical data to model a portfolio's performance. 
Simply assuming a uniform return over long-ish periods will only give you ball-park estimates because you'll never actually have that kind of steady, non-volatile situation.

This is one of those things you can't really predict or control.  Either run some cFIREsim simulations and see at what point a given percentage of scenarios (say, 50% cross above your FI number), or just use the simplistic compound interest calculators and input pessimistic and optimsitic return scenarios to give you an idea.

Ultimately what might happen or what has happened won't matter - only what will happen.  That's impossible to know, so just keep plugging away until you're done.

Jack

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Re: Basic question about compound interest on accounts
« Reply #4 on: October 14, 2016, 11:01:17 AM »
You can also run monte carlo simulations (especially if you're skeptical of using historical data on the theory that the future might not be like the past). At that point you're well outside the realm of a "basic question," though!

MDM

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Re: Basic question about compound interest on accounts
« Reply #5 on: October 14, 2016, 12:13:40 PM »
Do you know of any better ways to calculate how much money I might have in a certain number of years?
No.

MoonLiteNite

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Re: Basic question about compound interest on accounts
« Reply #6 on: October 14, 2016, 12:59:27 PM »
Do you know of any better ways to calculate how much money I might have in a certain number of years?
Well you can use those programs as you were, but when asked for the % rate, use something like 4 or 7, be very low with your numbers. And use yearly.

There is no way to know for sure, unless you just save cash or put everything into CDs or MMAs

robartsd

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Re: Basic question about compound interest on accounts
« Reply #7 on: October 14, 2016, 01:08:39 PM »
The problem with cFIREsim and FIREcalc is that they are focused on evaluating if you are ready for a long retirement, not how long it will take to accumulate for your retirement. The Financial Independence Calculator on portfoliocharts.com might help estimate the accumulation time required.

nereo

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Re: Basic question about compound interest on accounts
« Reply #8 on: October 14, 2016, 01:22:10 PM »
The problem with cFIREsim and FIREcalc is that they are focused on evaluating if you are ready for a long retirement, not how long it will take to accumulate for your retirement. The Financial Independence Calculator on portfoliocharts.com might help estimate the accumulation time required.

Not really.  They simply use historical data under whatever inputs you choose.  In cFireSIM you can start your retirement date any point in the future.  For both you can set the withdraw rate to $0 and add additional savings, then get a spread of how your portfolio would have grown (or shrank) under different amounts of time, historically. With cFIREsim you can download the CSV file associated with the output data.

Full Beard

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Re: Basic question about compound interest on accounts
« Reply #9 on: October 14, 2016, 01:46:06 PM »
I like to use the investment calculator from Dave Ramsey's website, http://daveramsey.com/blog/investment-calculator/?snid=tools.investingcalc#/entry_form

Like MoonLiteNite suggested, I usually use rates of return between 4 and 7 percent.  It's just to give me a ballpark estimate as to how much I should be saving.

a1pharm

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Re: Basic question about compound interest on accounts
« Reply #10 on: October 14, 2016, 04:47:45 PM »
Use these equations I wrote:

FV=p((1+i)^Y-1)/i+P(1+i)^Y

p = yearly contribution
i= rate of return
Y = years to contribute
P = initial value
FV= final value of all investments

You can put this in excel and more easily mess w/ your estimates.  I use this equation a TON, and you should too.

robartsd

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Re: Basic question about compound interest on accounts
« Reply #11 on: October 14, 2016, 05:22:12 PM »
Use these equations I wrote:

FV=p((1+i)^Y-1)/i+P(1+i)^Y

p = yearly contribution
i= rate of return
Y = years to contribute
P = initial value
FV= final value of all investments

You can put this in excel and more easily mess w/ your estimates.  I use this equation a TON, and you should too.
In Excel I use the built-in FV function. It is written from a cash flow point of view, so the result has the opposite sign of the payment and initial value (assuming they have the same sign).
Code: [Select]
FV(rate rate, number of periods, payment, [present value], [payment at start of period?])