The 3 key things which can help in calculating the amount that will returned on an investment are as follows:
a. Amount to be Invested (P)
b. Duration of Investment (T)
c. Rate of Return (R)
Mathematically (& simply) put the Maturity Amount (A) for this investment is represented by the following equation:
A = P * (1 + R)T
Ceteris paribus, any change in one of these would change the maturity amount that you get so:
- if you invest a bigger Amount (P)…you would get a higher Maturity Amount (A)…& vice versa
- as the time period (T) of investment increased …the Maturity Amount (A) increased…& vice versa
- as the Rate of Return (R) increased…again the Maturity Amount (A) increased…& vice versa
So one would assume that while making an investment for a long-term goal all these parameters would be equally thought over and an appropriate decision made. However most of us spend inordinate amount of time to analyze & optimize the Rate of Return (R) while paying scant attention to the Amount that being Invested (P) and the Time Period (T) of investment. In trying to maximize the Rate of Return, the investments are delayed and they do not backed by enough Investment Amount (I) or we run out of runway (T) to reach our goal. In essence we delay our investments.
In my view – a more appropriate method would be to select financial investment options based on risk appetite – then use an average Rate of Return (R) and then figure out what is the Amount (P) required to be invested if the financial goal (A) is a certain time (T) away. This way you start getting the benefits of compounding earlier in your life.
So, please stop worrying about things that are beyond your control and Keep Investing.