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“What is your rate of return?”

“I made $4000 last week,” he said. I chewed my chicken strips, suitably impressed.

“I made $4000 last week,” a colleague told me over lunch.

I chewed my chicken strips, suitably impressed. The sauce-laden meat was heavy on my tongue. I had eaten pretty much the same thing three times this week because it was the cheapest stuff I could eat around my workplace.

So this colleague of mine, he is what you would call an active investor. He trades on the Forex three times a week on his mobile phone.

“You can’t always rely on a salary,” he said. I nodded, wiping up the last of the meat sauce in my bowl.

I happened to have a rich friend. (Actually he’s not very rich, compared to the millionaires who live in my country. But he’s richer than me. And he knows more about money matters than me. So he is my rich friend.) I told my rich friend about my colleague. My rich friend listened, not very interested.

“Ask him what is his rate of return over a year,” my rich friend said.

So the next time my colleague mentioned again that he made four thousand dollars last week, I dutifully asked my colleague, “What is your rate of return over a year?”

“Four thousand,” he replied.

“No,” I said. “You win some and you lose some over a year. How much did you make over a year?” I wanted to know the percentage.

He thought for a bit. “40%,” he replied.

I looked at my colleague, taken aback.

I don’t know much about Forex trading, but I do know that an annual 30% return on any investment was considered very high.

How to calculate your rate of return over a year

So that got me interested in learning how to calculate the rate of returns.

Yeah, I know, I asked my colleague what his rate of returns is, like I know my stuff. I mean, I do know what the rate of return is (intellectually). But I want to sit down and go through the math properly. I had flunked my math pretty much all the way during my early schooling years, and calculations still make me kind of nervous today. (Kids, if you are reading this, go study your math. Learn how to count your money.)

So the formula for the the rate of return is simply:

Let’s say I invested $50,000 at the beginning of the year.

At the end of the year, my investment had grown to $54,000.

So let’s do the math.

The rate of my return on my investment for the year is 8%.

(That’s a pretty decent return rate actually.)

That wasn’t so hard to calculate, was it?