How to Calculate Interest Rate with Deposits and Withdrawls

People tend to do many different things when it comes to investing. Some people will set a certain amount aside and once they have "arrived", they will let that money sit in a savings account. This is likened to buying some tools and just letting them rust in the shed.

Other people, will accumulate a nice savings and then invest it, hoping that this investment will produce good fortune. This is likened to purchasing a small plant that was nurtured since it was a baby seed, then taking that plant and searching for a location to plant it into the ground, then sitting back crossing your fingers and hoping it will grow.

Finally, other people, will steadily grow their savings, never "arriving" but out of sheer habit, setting aside a specified percentage of their income and continuing to invest over time. This is likened to planting an orchard. It is not surprising that the orchard planters are the successful ones, and rare at that.

If you are an orchard planter, how do you calculate your interest rate. You will need to know the deposits/withdrawls made along with the dates. In addition, you will need to know the current net worth and current date.

• On 04/02/2013, a man spent $300 purchasing stock.
• On 05/03/2013, a man spent $300 purchasing stock.
• On 09/03/2013, a man spent $300 purchasing stock.
• On 10/01/2013, a man spent $300 purchasing stock.
• On 11/01/2013, a man spent $300 purchasing stock.
• On 12/01/2013, a man spent $300 purchasing stock.
• On 01/02/2014, a man spent $250 purchasing stock.
• On 02/04/2014, a man spent $250 purchasing stock.
• On 03/04/2014, a man spent $250 purchasing stock.
• On 04/02/2014, a man spent $300 purchasing stock.
• On 05/02/2014, a man spent $300 purchasing stock.
• Today, 05/30/2014, the man's stock is worth 3170.14.

When it comes to listing deposits, you should include money used before sales charges as positive numbers. When it comes to listing withdrawls, you should include money withdrawn after sales charges as negative numbers. You should also include money used to pay taxes as a negative number. This will give your own personal interest rate (and profit) as opposed to the investment's reported interest rate.

To calculate the interest rate, r, you must solve the equation:

P1(1+r)^Y1 + P2(1+r)^Y2 + ... + PN(1+r)^YN = PF

From our example above, P1 is the $300 and Y1 is the number of years between 04/02/2013 and 05/30/2014. PF is 3170.14. This can be solved using a binary algorithm. See sizustech.blogspot.com for a Java example.

Solving this equation gives an interest rate of 1.17%.

This post was reposted from http://finlit.biz/retirement-2/how-to-calculate-interest-rate-with-deposits-and-withdrawls/, originally written on May 30th, 2014.