Dollar Cost Averaging Calculator
If you want to see firsthand what dollar cost averaging can do for you, you need to try out my free online dollar cost averaging calculator. If you have spent any time at all looking at mutual fund investing, then you are undoubtedly familiar with the concept and power of dollar cost averaging (DCA).
In a nutshell, DCA lets you invest a fixed amount per month or quarter with the net effect of generating higher returns on your investment than the average return of the fund in which you invest. If you want to know more, you can read my article on Dollar Cost Averaging here.
However, you can read about DCA and the power of compounding as much as you wish, but you may never fully appreciate what it can do for your future unless you actually do a few runs on a Dollar Cost Averaging calculator. So, this page discusses how to use the free online calculator available on my website.
My calculator lets you enter your initial investment and monthly contributions, project your average annual returns, and then it tells you how much you will have in the future as well as how much income it will generate for you. Finally, this dollar cost averaging calculator lets you specify how much or what percentage you would like to withdraw per month, and the calculator will tell you how long your money will last.
Most people associate dollar cost averaging with mutual funds. However, it also can apply to exchange traded funds, individual stocks, savings bonds, certificates of deposit (CD’s), savings accounts, … pretty much anywhere you can periodically invest and compound your money.
Detailed Dollar Cost Averaging Calculator Instructions
Click here to open a new window with the dollar cost averaging calculator. If your browser opens the new window as a tab and you want to view the calculator at the same time your view the instructions, click on the tab itself and drag it off the browser window. This will open a new instance of your browser and you can see both windows side by side.
With the dollar cost averaging calculator window open …
1. Enter the amount of money you already have invested or plan to invest up front. This is your “initial investment” amount.
2. Enter the number of years and months you plan to invest on a periodic basis. This could the number of years and months until some point in your life such as your retirement date or until your child starts college, or whatever.
3. On the fourth box from the top (the 3rd line down), enter how much you plan to invest on a monthly basis. This amount is foundation of the concept of dollar cost averaging. This amount will buy you more shares when prices are lower and fewer shares when prices are higher.
4. Enter the average annual rate of return you expect your investment to earn. This could be an interest rate on a CD or savings account … the dividend yield on a bond fund, money market account, or savings bonds … or the average growth rate plus dividend yield of a mutual fund, closed end fund, exchange traded fund, etc. It’s how much you expect the investment to go up per year.
5. On the next line, enter how much (in dollars) you plan to withdraw per Month AFTER you stop depositing more money in the account. In other words, if you are going to stop depositing money when you retire and you expect to begin withdrawing $500 PER MONTH, then enter $500.
6. On the next box down, enter a “percentage” you plan to withdraw PER YEAR. Most financial advisors recommend you withdraw no more than 4% to ensure the investment will exist the rest of your life (hopefully). However, you can enter whatever figure you wish. The dollar cost averaging calculator will report a result for both the “fixed payment” withdrawal method and the percentage method.
7. The final box above the “Calculate” button is where you should enter the projected annual returns you expect your investment to achieve AFTER you stop depositing money each month. In other words, if you are going to move all the money to a money market fund (where you money is very safe), you might enter 2% (recently, during 2010 and 2011, money markets are generating only 0.5%). If you are going to leave it a stock mutual fund, you might enter 7 or 8%. If you want to enter 8%, enter an “8” in the box. If you are projecting 0.5%, enter “0.5”.
8. Click on the “Calculate” button.
Interpreting Your Dollar Cost Averaging Calculator Results
The “Total Account Balance” box shows how much your investment account is expected to be worth at the time you stop contributing more money (i.e., when you stop dollar cost averaging). This figure is based on your initial investment, monthly contributions, and monthly compounded returns based on your average projected rate of return over the term you specified.
The “Cumulative Monthly Deposits” line shows how much invested over the full term … excluding your initial investment.
The “Total Amount You Invested” line is your initial investment plus your cumulative monthly deposits.
The “Monthly Earnings” line shows how much money your account balance will generate after you stop adding more money each month … based on your projected annual return (ROR #2 in the top half of the calculator) AFTER you stop contributing monthly. This is a very important figure, because if you take out less money than the account is generating each month, your money will not only last the rest of your life and provide a nice inheritance to your kids or other benefactors, but it will actually grow every year too (excluding the potential of negative returns over the short-term).
The “Monthly Withdrawals” line shows how much money you will be withdrawing when you use the “percentage withdrawal” method to pull money out of the account. For example, when you completed the top half of the dollar cost averaging calculator, you entered a monthly withdrawal “amount” and you entered an annual percentage to withdraw. If you decided to take out 4% of the balance each year, wouldn’t you like to know how much that is per month? … Well, that’s what this line shows you. If you had $100,000 and decided to withdraw 4% annually, that would be $4,000 per year or $333.33 per month (assuming a flat withdrawal amount every month).
Finally, the large text box at the bottom of the calculator, tells you how long your money will last using both the “fixed monthly payment” withdrawal method and the “annual percentage” withdrawal
This calculator, although simple to use, is a very powerful tool. You can project what your current savings will be worth (even if you add no more money to it), what your dollar cost averaged investments will be worth, how much money you will have to cover major expenses, and how much you need to save and invest to meet your future goals. Spend some time experimenting with the Dollar Cost Averaging calculator, and don’t forget to bookmark this page so you can come back often.
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