Automatic Investment Plan Calculator
Investing is great, but what is even better is investing on a regular basis. With our Automatic Investment Plan Calculator, you will be able to see how far you can go by unleashing the magic of compounding returns and regular deposits.
What is an Automatic Investment Plan Calculator?
You may have heard the saying “timing the market is not as important as time in the market”. This philosophy essentially tells investors not to worry about getting into the market at the “perfect time”. Instead, keeping your investments invested in the market for long periods is likely to help you see growth on your portfolio long-term as the markets have a natural tendency to go up over the years. An Automatic Investment Plan (AIP) is based off the same principle.
By investing a fixed amount on a regular basis, investors can take advantage of this natural upward movement of markets over time to build large portfolios from seemingly small amounts today. This is due to the effect of compounding interest. To illustrate compounding, let’s take a simple example of a $1000 portfolio that grows at 10% each year for 3 years.
- In the first year, the $1000 portfolio will grow to $1100. This represents growth of $100 over the original investment.
- In the second year, the portfolio will grow to $1210. This represents growth of $110 from the amount at the end of Year 1.
- In the third year, the portfolio will grow to $1331. This represents growth of $121 from the amount at the end of Year 2.
- As you can see, the amount of growth is progressively increasing each year. This is compounding in a nutshell where as your investment size increases each year, each dollar of growth fuels additional growth. The Hardbacon Automatic Investment Calculator can therefore be used to:
- View the expected size of your portfolio at the end of a certain number of years based on your current savings, monthly deposit rate, and returns assumptions
- Experiment with different monthly deposit rates and projected returns to see how that changes the final number
- Work backwards to your monthly deposit rate based on the target portfolio size you want to have built up at the end of a specified number of years
How to use the Hardbacon Automatic Investment Plan Calculator
The objective of the Automatic Investment Plan Calculator is to provide an approximation of how much the size of your investment can grow to if you are disciplined with your periodic deposit amounts. To that end, you simply need to input a few variables specific to you and the calculator does the rest. The primary inputs that the user needs to enter are:
Initial investment: The amount you are starting your investment journey with
Contribution amount: The deposit that you will make into the investment account periodically
Contribution frequency: You can select how frequently you will be depositing money into the investment account. Options available are ‘weekly’, ‘bi-weekly’, and ‘monthly’
Projected annual rate of return: This is the rate of return that you expect to earn on the markets per year on average over the specified number of years
Compounding frequency: This is the number of times that you expect to earn an incremental amount on your investment that can be reinvested back into the markets. For example, if your investment is in a stock that pays quarterly dividends, then your compounding frequency would be ‘quarterly’
Duration of the investment: Lastly, you need to enter the total length of the period that you expect to continue depositing money for. This number is measured in years.
Understanding the results of the Automatic Investment Plan Calculator
Once you have entered all of the inputs on the left side of the screen, turn your attention to the right to see the results. You should see a few numbers and graphs here:
Regular contribution: This number is the total dollar amount of deposits that you made over the years. You can verify this by multiplying your periodic deposit amount by the number of periods per year (i.e., 12 if you contributed monthly, 26 if you contributed bi-weekly, and 52 if you contributed weekly). Multiply this result by the number of years (i.e., the duration of the investment).
Total contribution: The total contribution is your regular contribution plus the initial investment you placed into the investment account.
Investment growth: This figure represents the dollar amount of profit that your deposits generated over the number of years you selected. For example, if your ‘Investment growth’ number is $1 million, that means that you have generated $1 million of profit over and above the cumulative amount that you contributed.
Value at the end of the period: Lastly, this number gives you the total amount you should have in your investment account based on your inputs. Put simply, this is the sum of the ‘Total contribution’ and ‘Investment growth’ numbers.
Learn more about the Automatic Investment Plan Calculator Inputs
If you are wondering about the specific inputs that go into the Automatic Investment Calculator, here is a little primer on what is the purpose of each input variable and where you can find the required data to enter accurate information.
Initial investment: The initial investment is the amount that you place into the markets on Day 1 of your investment journey. If you have savings that you will be placing as a starter investment, then enter the amount of the savings. It is also totally okay to put zero if you are just starting your investment journey.
Contribution amount: Once you have budgeted your monthly income and expenses, you should hopefully have a surplus amount. You can choose to enter all or part of this surplus amount as your contribution amount depending on your preferences. Typically, you should aim to have 3 to 6 months of funds available as an emergency fund that you can tap into at short notice. Also, it might be wise to add an extra 5-10% on your total monthly expenses just to ensure that you are covered for unforeseen costs.
Contribution frequency: Depending on how frequently you want to contribute to your investment account, you can select ‘weekly’, ‘biweekly’ or ‘monthly’. A lot of people choose to deduct a certain sum for each paycheck. If you are one of these people, you would then select ‘biweekly’. Alternatively, if you want the amount to be deposited at the end of each month, you can select ‘monthly’.
Projected annual rate of return: The projected rate of return would depend on the assets and markets that you are invested in. Typically, an equity portfolio can expect to earn 7-10% over the long term. However, if you hold a mixed portfolio of equities and bonds, you might have a lower average return. To get the most accurate number, you should ask your financial advisor for assistance if required.
Compounding frequency: In most cases, you would be best off by selecting ‘annually’. However, if your money is invested into a certain bond that makes regular interest payments or a stock that pays regular dividends, the compounding frequency would then differ accordingly.
Duration of the investment: The duration of the investment is again contingent on your own situation. If you are saving for a child’s education, you might want to enter the number of years until they leave for university. If you are saving for retirement, then you can enter the number of years until you turn 65.
Frequently Asked Question
1. What is an automatic investment plan (AIP)?
An automatic investment plan is a type of investment program that allows the investor to deposit a pre-defined, fixed sum of capital at periodic intervals into a specific portfolio of assets (stocks, bonds, ETFs, etc.). Often, the funds are deducted straight from the investor’s biweekly or monthly paycheck. Alternatively, they can also be programmed to be deposited at a set frequency directly from your bank account (similar to a bill payment).
2. Can you get money out of an automatic investment plan?
Yes, you should usually be able to make a withdrawal from an automatic investment plan although the specific terms and conditions may vary depending on which brokerage you set up your investment account with. However, it is in your best interests not to make withdrawals unless absolutely necessary. Any amount taken out will spend less time in the market where it would have otherwise progressively compounded. This leaves you with a lower total investment value at the end of the specified period.
3. Is automatic investing a good idea?
Making automatic investments is generally seen as a good financial strategy for a few reasons:
- Life can get busy. You do not want to miss out on long-term growth just because you are too caught up in your job, raising a child, etc. An AIP can ensure that you continue making regular deposits without having to worry about manually doing it yourself each time.
- Not everyone has the investment background required to carefully select a basket of stocks or bonds each time. The AIP allows you to enter your money into a defined list of assets each time you make a deposit.
- Over the long term, the markets have trended up. While past performance is never a guarantee of future results, small sums of money can add up into hundreds of thousands or even million dollars due to the effects of compounding.
4. Can you automatically invest in ETFs?
The easiest way to invest automatically in ETFs is to pick a robo-advisor that allows you to set-up auto-deposits. Since robo-advisors invest your money in ETFs portfolios, your money will be automatically invested in ETFs.