Understanding CAGR: A Simple Explanation

The Compound Annual Growth Rate (CAGR) is a useful way to measure how much an investment grows on average each year over a set period. It’s handy when you want to know the average yearly return on an investment.

How to Calculate CAGR?

To figure out CAGR, you need two things:

• Starting Value: This is how much your investment was worth at the beginning.
• Ending Value: This is how much it’s worth at the end of the time period.

Why Use CAGR?

CAGR is useful because it gives a clearer picture of how an investment has grown, even if the growth rate changed from year to year. It smooths out any ups and downs, showing the average annual growth.

Example of CAGR Calculation:

For example, if you invested $10,000 in a stock, and after 5 years it grew to $15,000, you can calculate the CAGR like this:

• Starting Value = $10,000
• Ending Value = $15,000
• Number of Years = 5

In this case, the CAGR would be around 8.45% per year.

Conclusion

CAGR is a simple but effective way to understand the average growth of your investments over time. Knowing how to calculate and use it can help you make better decisions and understand how well your investments are doing. It’s a key concept for anyone looking to evaluate investment growth.