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I decided to get a bit more involved with my FIRE planning. I've got a spreadsheet that calculates and charts my net worth from Quicken data. I wanted to isolate my investment savings and calculate a return on investment for future projections.

Isolating the investment savings was easy, just add the appropriate cells. Calculating the ROI was a bit more daunting with money being added and (occasionally) removed. I came up with the following scheme:

I calculate a monthly ROI which equals the (current value – cash flow)/(last month value) – 1. For example, lets say at the end of August I have $15,375 in my 401k. I add $375 in September. After market fluctuations, I end up with $16,000 at the end of September. My monthly ROI is (16000-375)/15375 – 1 = 1.63%.

Calculating the monthly ROI is easy enough, but how to calculate a yearly or 5 year return? It occurred to me that I should be able to take the product of 1 + monthly ROI for 12 months minus 1 to get an annual return. See the following example:

12/03 01/04 02/04 03/04 04/04 05/04
Value $14,750 $15,000 $15,750 $15,500 $16,000 $16,250
Cash Flow $350 $500 $200 -$300 $500
1 Month ROI -0.68% 1.67% -2.86% 5.16% -1.56%


06/04 07/04 08/04 09/04 10/04 11/04 12/04
Value $16,750 $17,250 $18,000 $18,250 $18,350 $18,500 $19,000
Cash Flow $100 $300 $600 $400 $200 $100 $200
1 Month ROI 2.46% 1.19% 0.87% -0.83% -0.55% 0.27% 1.62%
1 Year ROI 6.73%

So in this case the 1 year return would be (0.993*1.017*0.971*1.052*0.984*1.025*1.012*1.009*0.992*0.995*1.003*1.016) – 1 = 6.73%.

I have this data going back to '95 so I can calculate a long term return and average cash flow. This gives me some good history for projecting into the future.

Are my calculation methods valid and accurate? What other methods have people used for calculating ROI with variable cash flows?


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