![\"money](\"https:\/\/eor7ztmv4pb.exactdn.com\/wp-content\/uploads\/2019\/07\/cagr-calculator-graph-1024x681.jpg?strip=all&lossy=1&ssl=1\")
<\/figure><\/div>\n\n\n<\/p>\n\n\n\n
Introduction to Compounding and CAGR<\/h2>\n\n\n\n
CAGR. What the heck is CAGR? Well, it\u2019s an acronym for Compound Annual Growth Rate<\/strong>, or in other words, the rate that something compounds on an annual basis<\/strong>. Almost always, this will be in reference to money, but that\u2019s not the only time this applies. Let\u2019s get down to some Compounding 101.<\/p>\n\n\n\n You might\u2019ve heard people say, \u201cI compounded<\/strong> the problem by trying to make things right.\u201d What they are actually saying is that they took a bad situation and made that situation even worse. Fortunately for all of us, not all examples of compounding are about making situations worse. <\/p>\n\n\n\n\n\n\n\n For instance, imagine if you were a bodybuilder and you were told that from ages 18-30, you would gain 5% in your bench press each year. If you benched 225 pounds as an 18-year-old, your next year you\u2019re going to bench 236 pounds (1.05*225), or an increase of 11 pounds. The next year you would bench 248 pounds (1.05*236), or an increase of 12 pounds. In essence, you will gain more strength each year because you\u2019re gaining 5% strength on a larger number.<\/p>\n\n\n <\/p>\n\n\n\n As you can see by looking at the chart above, you will have gained 19 pounds in strength when you\u2019re 30 (385*1.05) compared to the 11-pound gain your first year. This, in essence, is the beauty of compound interest<\/strong>. <\/p>\n\n\n\n The longer that you let something have the ability to compound, the larger your number, in the end, will be. You\u2019re building gains on top of gains<\/mark>. <\/p>\n\n\n\n Please note that this is an example and not me saying you\u2019re going to go from benching 225 to 400+ in 12 years. Although I\u2019m sure some people do, I can confirm that I am not one of these people.\u00a0<\/p>\n\n\n\n Something that\u2019s very important to note, both in this example and in any other, is that our bodies don\u2019t continue to get in better shape. Eventually, we will likely experience health issues, so the value of compounding mainly comes from time. <\/p>\n\n\n\n The sooner you start, the better because you will have that much more time to allow your task to compound. Compounding is all about the long game.<\/p>\n\n\n\n <\/p>\n\n\n\n Now, to put this into money terms –\u00a0the same exact philosophy can be applied to investing. <\/p>\n\n\n\n The earlier that you start investing, the earlier that you will start seeing the benefits of investing in the stock market, and the larger those benefits will be when you get to retirement age. Want to have your mind blown? Ok, FINE! I\u2019ll do it.<\/p>\n\n\n\n If you invested $100\/month for your child starting the month they were born, and you received an 8% CAGR (the S&P 500 average since 1950 is 11%), then you would have $1,778,852.75<\/span> when they turned 60. This process would\u2019ve cost you a total of $72,000<\/strong> ($100*12 months*60 years). That works out to $1,706,852.75 just from compounding<\/em>.<\/p>\n\n\n\n For your child to have about that same amount of money when they turned 60, assuming they started investing when they were 22 and also received an 8% CAGR, they would have to invest over $602\/month for 38 years. Doing this would\u2019ve cost them a total of $274,512<\/strong> ($602*12 months*38 years)!\u00a0How insane is that?\u00a0<\/p>\n\n\n\n That, my friends, is the value of compound interest. <\/p>\n\n\n\n Time matters more than the actual amount that you put in<\/mark>.\u00a0By starting when your child was just born, you can have the same amount for them when they\u2019re 60 by putting in $200,000 less in total (You put in $72,000 in total while they put in $274,512 in total).\u00a0<\/p>\n\n\n <\/p>\n\n\n\n Now, I\u2019ll admit, this might seem like a somewhat outlandish type of comparison because you are likely looking for how to get your own retirement going, and I 100% respect that. <\/p>\n\n\n\n I am in that same boat. <\/p>\n\n\n\n You need to focus on yourself first because if all you do is save for your child, then they\u2019re going to be paying for your retirement (so it basically is you saving for it in a roundabout way lol). But I challenge you to really, really think about this\u2026<\/p>\n\n\n\n If your goal is to live a happy life, and you want your children to live a great life, then can you find $100\/month that you\u2019re blowing on something you don\u2019t need? The cost is so small to you to set them up for success in their life. <\/p>\n\n\n\n Maybe it\u2019s not $100. <\/p>\n\n\n\n Maybe it\u2019s $25. That\u2019s literally one meal for yourself and your spouse. Can you eat at home one extra night\/month? <\/p>\n\n\n\n Saving $25\/month for that same 60 years will give them $444,713.19<\/span>. Not nearly as high as $100\/month, but still enough to make a significant difference in their quality of life.\u00a0Ok, end rant.<\/p>\n\n\n\n So, you likely understand the value of compound interest now, and that while the amount that you put in is important, time is the most important factor, so it\u2019s better to start as early as possible. <\/p>\n\n\n\n A couple of months ago, I wrote an article that showed you how to calculate compound interest based on a static number<\/a>. For instance, if you input $10,000 dollars and you let it earn X interest for X years, how much would you have? <\/p>\n\n\n\n Such as, if you invested $10,000\ninto the stock market and realized a 6% CAGR (reminder that the S&P Average\nsince 1950 is 11%), you would have the following:<\/p>\n\n\n <\/p>\n\n\n\n I\u2019ve found some great compound interest calculators online that are very helpful, but they\u2019re basic and somewhat inflexible. I wanted to create something that you could use that really fits the situation that you\u2019re in. <\/p>\n\n\n\n For instance, maybe you intend to invest $250\/month each and every month. That\u2019s great! But what if your AC dies on you (like ours just did), and you now have the choice \u2013 die of heat exhaustion and go without AC or slow down your investing a bit? <\/p>\n\n\n\n I know there are always more options, but for this example, let\u2019s assume that you decide to do a combination of spending less and investing less to help you pay for the AC. To achieve this, let’s assume you will have to go three months without investing for retirement. <\/p>\n\n\n\n Well, this Excel CAGR Formula tool<\/strong> <\/a>can calculate that, and online calculators cannot.\u00a0Let\u2019s take a look!<\/p>\n\n\n\n Step 1<\/strong>: On the tab labeled \u2018Contribution Details,\u2019 you can input how much money you plan to invest and how much you have actually invested.\u00a0You\u2019ll notice that the first 7 months are green, but that\u2019s just because I like to highlight finalized numbers, so I know what\u2019s planned and what is actual.\u00a0All of these cells are hardcoded, so you can simply go in and change your anticipated savings amount for any month by just overwriting the cell.\u00a0It\u2019s a very easy update to make!<\/p>\n\n\n <\/p>\n\n\n\n Step 2<\/strong>: Take a look at the tab titled \u2018CAGR Calculator.\u2019\u00a0All you need to do is change the cell that\u2019s highlighted green to update what assumption you want to make for your portfolio growth.\u00a0Once you do that, the rest auto-populates based on your input on the previous tab.<\/p>\n\n\n <\/p>\n\n\n\n My favorite thing about this tab is that it\u2019s able to be personalized. You can manually update your investment amounts each month because, guess what, life happens. You\u2019re not always going to invest the exact same amount each month from now until death. Not only that but maybe you want to update your portfolio with actual data! <\/p>\n\n\n\n For instance, let\u2019s imagine that you get huge returns your first year. Now instead of your portfolio sitting at $2,342, which would be your expected amount based on the returns that I input (8%) and the monthly investments that I added, your portfolio is sitting at $3,300!\u00a0Talk about a monster year.\u00a0<\/p>\n\n\n\n To update this, all you need to do is simply override the cell.\u00a0So, since we\u2019re saying you ended the year at $3,300 in this hypothetical example, update the December 2019 cell to $3,300 and then it will continue calculating the remaining years based off that same value.<\/p>\n\n\n <\/p>\n\n\n\n Now, that\u2019s all lovey-dovey and a good problem to have\u2026 \u201cOh, I made too much money. How am I ever going to update my spreadsheet?\u201d\u00a0Wah wah, boo hoo.\u00a0<\/p>\n\n\n\n The best part of this CAGR Calculator Excel version is that instead of you seeing 8% returns in year 1, your returns are pathetic!\u00a0Let\u2019s pretend you end the year at $2,195, or a -5% return!\u00a0Dang, that was brutal.\u00a0BUT!\u00a0This tool can show you what you need to do to get back on track.\u00a0<\/p>\n\n\n\n For instance, in our first example of 8% returns, your total portfolio would be $9,231 after three years:<\/p>\n\n\n <\/p>\n\n\n\n But we just discussed that your Year 1 return was very low, so you need to make that up somehow.\u00a0So, how do you do that?\u00a0Well, first, you need to input your actual Year 1 return in the December 2019 cell, which was $2,195.\u00a0<\/p>\n\n\n\n Next, go to the \u2018Contribution Details\u2019 tab and change your Contribution Amount for the months that you think you can. If you change your contribution amount each month for Years 2 & 3 from $250 to $257, you\u2019re actually ahead of the $9,231 goal that you initially had. See below:<\/p>\n\n\n![\"5%](\"https:\/\/eor7ztmv4pb.exactdn.com\/wp-content\/uploads\/2019\/07\/cagr-1.png?strip=all&lossy=1&ssl=1\")
<\/a><\/figure><\/div>\n\n\nApplying CAGR to Money in the Stock\nMarket<\/h2>\n\n\n\n
![\"compounding](\"https:\/\/eor7ztmv4pb.exactdn.com\/wp-content\/uploads\/2019\/07\/cagr-2.png?strip=all&lossy=1&ssl=1\")
<\/a><\/figure><\/div>\n\n\nSaving for Retirement<\/h2>\n\n\n\n
![\"excel](\"https:\/\/eor7ztmv4pb.exactdn.com\/wp-content\/uploads\/2019\/07\/cagr-3.png?strip=all&lossy=1&ssl=1\")
<\/a><\/figure><\/div>\n\n\nCAGR Spreadsheet Explained (Downloadable)<\/h2>\n\n\n\n
![\"CAGR](\"https:\/\/eor7ztmv4pb.exactdn.com\/wp-content\/uploads\/2019\/07\/cagr-4-1024x130.png?strip=all&lossy=1&ssl=1\")
<\/a>![\"CAGR](\"https:\/\/eor7ztmv4pb.exactdn.com\/wp-content\/uploads\/2019\/07\/cagr-5-1024x193.png?strip=all&lossy=1&ssl=1\")
<\/a>Spreadsheet Examples<\/h2>\n\n\n\n
![\"CAGR](\"https:\/\/eor7ztmv4pb.exactdn.com\/wp-content\/uploads\/2019\/07\/cagr-6-1024x193.png?strip=all&lossy=1&ssl=1\")
<\/a>![\"CAGR](\"https:\/\/eor7ztmv4pb.exactdn.com\/wp-content\/uploads\/2019\/07\/cagr-7-1024x193.png?strip=all&lossy=1&ssl=1\")
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![\"CAGR](\"https:\/\/eor7ztmv4pb.exactdn.com\/wp-content\/uploads\/2019\/07\/cagr-8-1024x193.png?strip=all&lossy=1&ssl=1\")
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