📈 Have you ever looked at an investment and wondered, “How fast did this actually grow each year?” That’s where CAGR, or Compound Annual Growth Rate, comes in!
It sounds fancy, but don’t worry—I’ll break it down so it’s super easy to understand.
Table of Contents
🙋 What Is CAGR?
CAGR shows you the average annual growth rate of an investment over time, assuming the growth happened steadily every year (even if it didn’t in real life).
Think of it like this: if your investment grew from $1,000 to $2,000 in 5 years, what consistent yearly growth rate would get you there? That’s the CAGR.
It’s perfect for comparing different investments or tracking performance over time!
✏️ The Formula
Here’s the CAGR formula:
CAGR = (Ending Value ÷ Beginning Value)^(1 ÷ Number of Years) – 1
Don’t let the formula scare you! Let’s go step-by-step with a fun example.
💰 Example: Growing Your Investment
Let’s say you invested $1,000 and after 5 years, it’s worth $2,000.
Plug those numbers into the formula:
CAGR = (2000 ÷ 1000)^(1 ÷ 5) – 1
CAGR = (2)^(0.2) – 1
CAGR ≈ 1.1487 – 1 = 0.1487 or 14.87%
🎉 So your investment grew at an average rate of 14.87% per year over 5 years!
⚙️ CAGR Calculator
Enter the Beginning and Ending Values and number of years. The tool below will give the Compound Annual Growth Rate as a percentage.
🔍 Why Use CAGR?
CAGR is awesome because:
- It gives you a clear, easy-to-compare number
- It smooths out the bumps from year-to-year changes
- It helps with planning and forecasting
Even if your investment had good years and bad years, CAGR tells you the “smoothed out” growth.
🧾 Quick Recap
- CAGR = average yearly growth over time 📆
- Use the formula: (Ending ÷ Beginning)^(1 ÷ Years) – 1
- Great for comparing investments or long-term performance
Whether you’re tracking your stock portfolio 📊, business revenue 💼, or even your savings 💰—CAGR is a powerful little tool to have in your back pocket!