How will index fund investing help you
Index Fund Investing Calculator
How this calculator works
The purpose of this calculator is to demonstrate the process, investment schedule and outcomes of index fund investing. By entering factors as your payment contribution, payment frequency, investment term and fund costs the model will calculate out the cashflows and term fund value.
Assume you are just starting out and you have no money in a current index fund. You are keen to begin your investment journey and see what you could amass by your predetermined retirement in 30 years. After completing the How to budget your money worksheets you have determined you can contribute $200 each fortnight to the fund. You have investigated a few low cost online brokers and successfully applied with one of them. They have a minimum trade value of $500 and the brokerage commission on such a value is $14.95. You have also investigated index funds and decided on one that offers no load low cost passive management for all in costs of 0.07% pa on your investment balance at the time of annual calculation. You have estimated the annual return on your chosen index to be 10% based on long term historical results. Your current bank account pays 3% nominal interest on your balance and the long term historical inflation rate in your country has been around 3%.You plug all this into the model and the results are tabulated. Instantly, you will be able to see the cashflows between your bank account and the index fund, in this case $600.69 will be transferred every 3 fortnights (6 weeks). You will also notice that in 30 years your estimated closing fund balance could be $948,460.41 with a personal contribution only amounting to $156,180.07, a 607% return on your investment for little effort and a lower risk profile than if you were to invest on your own stock picking abilities.
Personal circumstances differ and because of this taxes have been excluded from the model. Taxes are an important factor and should be considered in your final evaluation.
- Enter your beginning fund balance – if you have a nil balance enter zero (0)
- Enter your payment contribution – this is what you plan to contribute on a regular basis to the fund
- Enter your annual payment frequency – how often you will transfer funds into your bank “holding” account. If you plan to contribute $200 each week then enter 52 (52 weeks in a year)
- Enter the investment term – in whole years, this is the full time period you expect to continue contributing payments to the fund.
- Enter the minimum amount for investment – whether you invest direct into the fund or through a stock broker there will normally be a minimum amount to trade. This can range from $500 to $3,000 so be sure to investigate this.
- Enter the fund management costs – this can make a profound impact on the outcome and is one of the key factors in decisions to be made. This expense ratio can range from 0.07-2.0% so research this thoroughly.
- Enter the stockbroker transaction costs – another cost in ownership. Every trade will incur a commission for the intermediary to process the order. The fee can range from anywhere as low as $14.95 (a minimum cost) to a full 0.59% of the trade value.
- Enter the annual rate of return from the bank “holding” account – this factor isn’t important for the purposes of this model simply because you won’t be holding large sums for long time periods in this account. Just enter an arbitrary figure that matches something close to the present federal cash rate. In Australia, this is currently 2.0%.
- Enter the annual rate of return from the fund – this IS important. Past performance IS NOT an indicator of future performance and any claims made by the fund for expected future performance should be taken with a pinch of salt. Studies have shown the long term expected return on major indices such as the S&P 500 on US equities to be 7-10% but, this still isn’t guaranteed to continue indefinately. That being said, we need to estimate something so 7-10% (erring on the side of caution at 7%) would be a sound approximation.
- Enter the estimated inflation rate – Check with your federal government for details on long term inflation rates. The default is set at 3%, an average demonstrated in Australia since 2000.
Index Fund Investment Schedule
All fields marked with * are mandatory
Please signup to the eFM subscriber list if you would like to download the eFM ebook. Coming soon, this ebook will provide you with the step by step process to do-it-yourself financial planning.