In finance and investing, whether you’re looking at stocks or savings accounts, it’s often useful to calculate your returns to measure how you’re doing. One way is to calculate your compound annual growth rate or CAGR. The best way I’ve seen this defined is in the investopedia.com dictionary (hence the link), which says:
CAGR isn’t the actual return in reality. It’s an imaginary number that describes the rate at which an investment would have grown if it grew at a steady rate. You can think of CAGR as a way to smooth out the returns.
Here’s the general formula for calculating CAGR:
CAGR = (ending amount / beginning amount)(1 / # of years) – 1
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