When I posted about graduate couples having no problems saving $1 million, I used an investment return of 3% in my calculations.
If you can consistently generate a 3% return every year, you will turn $100,000 into $103,000 in 1 year, and then make that $103,000 become $106,090 in 1 more year. With such compounding, your initial $100k will become $130k in 10 years, and $175k in 20 years.
Suppose you can inject fresh funds of $100k into the pool every single year. In 20 years, you will be holding close to $2.7 million. But if you just save the $100k every year and don’t invest, you will be holding just $2 million (=20 x $100k).
Ok, in reality, there isn’t an investment, or a bank account, that gives a consistent 3% year in and year out.
Instead, you see some people making hundreds of thousands in a single condo investment, and some making huge returns in the stock market.
These investment gains are often one-off affairs and usually take years to be realized.
But how do we compare our investment profits?
The following calculator tool provides a reasonable way to do the comparison. It calculates your investment return rate as if you had invested in something that gives you a flat return rate over the years. (The tool assumes you saved a fixed amount every year.)
For example, suppose you have been working for 10 years and currently have a total net investable assets of $500,000. (You calculate your net investable assets the same way as you calculate your net worth, but exclude your stay-in property and car in your calculations.)
Let’s say you know that you made a net total profit of $100k in investments over your working life.
So, you enter the values 500000, 100000 and 10 into the tool below. The tool calculates that you made a very respectable 4.9% return every year.
What is your calculated investment return rate?