Determining Short-Term Investment Needs
This calculator provides an estimate of the funds needed today to finance a future expense or asset purchase. The calculator requires a total of six inputs, including:
- Today’s cost / value of the asset or expense to be purchased in the future
- The expected annual increase in the cost of the asset or expense
- The number of years until the asset is purchased or the expense occurs
- The buyer’s incremental income tax rate, which can include both federal as well as local income taxes
- The anticipated annual rate of return earned on the funds earmarked for the purchase of the asset or to pay for the expense
Using this information, the calculator then provides the user with the following:
- The buyer’s total return on investment
- The buyer’s return on investment after taking into consideration income taxes
- The projected future cost of the expense or asset
- The amount of funds needed today to buy the asset or pay for the expense in the future
What do we Mean by Short Term Investments
This calculator is designed to answer a very simple question in a straightforward manner. For example, let’s say you’re planning to buy a new car three years from now and that car currently sells for 35,000. If we use some of the latest inflation numbers in the United States, we think the price of that car might increase by around 5% per year. This purchase is in the future, so we can invest money today in the stock market and realize an average gain of around 8% per year.
Interpreting the Results of Our Calculator
In this example, the return on investment, or ROI (after income taxes), is higher than the average annual increase in the selling price of the car. This means the amount of money we need to set aside today is less than the selling price of the car today. The values just mentioned are the default values of our calculator. With a total ROI of 26.0% and an after tax ROI of 19.4% setting aside funds of 33,942 allows us to pay 40,517 for the car in three years.
Admittedly, it is not easy to predict the ROI of an investment if you’re looking for higher returns. That’s because achieving higher average returns involves a trade-off with risk. These higher risk investments also involve more uncertainty. This is especially true when evaluating relatively short investment timeframes (less than five years). Longer term investment timeframes, as is the case when setting aside money for a newborn’s college education, reduce much of the risk we see with shorter timeframes.