The savings plan calculator will show you how much you can accumulate if you put away a fixed amount each month.
Why must you be cautious about using the Savings Plan Calculator?
The savings plan calculator (which is widely distributed throughout the web and used by hundreds of sites) tends to significantly overestimate the interest you earn: the result given is then overly optimistic. Understanding why this is so can help you to avoid disappointment due to a figure for your savings that is larger than it should be.
An example will make it easier to see what is happening. If you enter a figure of $1,000 per month in savings over one year with an interest rate of 10%, the savings plan calculator will give a result of $13,200: the calculator calculates this using the 12 x $1,000 that you deposited meaning a total of $12,000, plus 10%, which is then an additional $1,200. The problem is that you would only earn the full 10% interest, if you deposited all the money ($12,000) at the beginning of the year. If you deposit $1,000 per month, the average amount of money in the account is $6,000 – not $12,000. Therefore you would really earn the equivalent of 10% interest on $6,000. In this case, the interest calculated by the calculator is twice as high as it should be.
How do you use The Savings Plan Calculator?
If you want to use the calculator for an initial estimate of how your savings might grow, then you’ll need to put in the following information:
Planned Monthly Savings: The fixed amount of money you’ll save each month (don’t put any commas in the figure)
Years To Save: The number of years over which you’ll let your savings grow. As the number of years increases, the savings plan calculator will overestimate less, but will still remain inaccurate.
Interest Rate Received: The interest rate per year to be applied to the money in your savings account.
The result… When you’ve entered in the data above and clicked on “Calculate”, you’ll see a figure for the total amount of money you’d accumulate in this case.
What are the limitations of the Savings Plan Calculator?
Apart from the inaccuracy that we’ve already mentioned, the calculator is limited to calculating a result on the basis of fixed monthly savings and a fixed interest rate, neither of which can be varied.