You might think that calculating the income from your personal investment is as simple as comparing your beginning and ending balances and finding the difference. This isn't very helpful if you're not planning on cashing out and want to make sure your portfolio is returning the best percentages possible.
There's no one best investment income formula for everyone – your investment income calculation should take into account a variety of factors, including percentage increases, dividends, interest, share price and taxes.
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What Exactly Is Investment Income?
Many investors define "income" (or "yield") as money they take out of their investment(s) each year, such as retirees living on investment income. Others look at the growth of their investment, which technically isn't income, explains Retire Certain.com. Before you try to calculate your investment income, you should first decide what you mean by "income."
Are you talking about money you take out of your investment each year so you can spend it or pay down debt? Are you talking about the increase in your investment's value? What about dividends? Are you re-investing your gains and buying more shares?
You might consider only money that you take out of your investment as income. You might consider any capital gains as income. You might look at any gains after taxes. You might simply consider any increase in your investment value as income.
To further complicate things, the term "investment income" is used to refer to a formula for evaluating a company's stock performance, explains the Corporate Finance Institute. Let's discuss personal investments.
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Data You'll Need
To calculate your investment income, you'll need the value of your investment at the start of the period you want to look at. For example, are you looking at your income for the year, a quarter or a month? We'll use a one-year period, which many people use to perform an annual review of their investments.
Next, you'll need your closing value at the end of your period. You will also need to know what you made (or lost) per share or another investment unit. In addition, you'll want to break out what you made in dividends. Finally, you will want to calculate your taxes and fees – some investments cost more to service than others.
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Calculate Individual Performance
Look separately at the performance of each investment you want to be included in your portfolio. You might be doing this exercise for one stock you own. You might have a 401(k) at work, a number of stocks you've purchased with an online trading account, a mutual fund, bonds or IRA.
To calculate the individual performance of investments, look at the start and end values of the stock or other asset. Subtract the beginning value from the end value to get your net gain or loss. Technically, this is not income, based on tax definitions.
Next, look at any dividends you earned. Add your stock gain or loss to your dividends. Finally, subtract any taxes you paid on your gains. If your stock increased by $5,000 this year and you earned $500 in dividend, and you paid no short-term taxes this year, your investments increased in value by $5,500. It's not income, depending on what you do with the money; however, this information is useful.
Calculate the Percentage Increase
To determine whether or not your investments are doing as well as or better than the market, calculate the percentage increase in wealth you attained this year. This is important, because you might be pleased with a $10,000 increase in your investment's value, but once you run your percentages, you might find you only saw a 4 percent increase when the market did 9 percent.
If your investment was worth $5,000 at the beginning of the year and you took out your full gain, pocketing $300 after paying all taxes and fees, you would divide $300 by $5,000 to determine that you made a net gain of 6 percent.
Calculate Your Overall Portfolio Performance
Using the steps outline above, you can run these numbers for your entire portfolio at once. This will help you compare your personal performance to the market or the performance of your investment broker or firm to its competitors.