DeluxeCalc

Lump Sum vs Monthly Investing

Which investment contribution strategy wins?

About this calculator

When you have a large sum to invest at once, such as a bonus, an inheritance or the proceeds of a sale, you can invest it all today or spread it out over several months, a method called dollar-cost averaging. Investing it all at once puts the whole amount to work immediately, so it usually ends up ahead when markets rise over time. Spreading it out keeps part of the money in cash for a while, which earns less but protects you if the market falls soon after you start. This calculator compares the two strategies with your numbers and shows how a fall in the first month can change the answer.

How to use this calculator

Enter the Amount Available Now and the number of months you would Spread Over, for example 12. Enter the Expected Annual Return of the investment, the Yield on Cash Waiting to Be Invested, such as a money market fund rate, and the Years to Compare. Under Advanced assumptions, the Market Drop in the First Month lets you test what happens if the market falls right after you invest. Results update as you type, and the inputs are saved in the page address so you can bookmark or share them.

The method

The calculation is deterministic, with no random market paths. A market index starts at 1 and grows each month at the monthly rate that compounds to the expected annual return. If you enter a market drop, the index instead falls by that percentage in the first month and grows at the expected return every month after. The lump sum buys the index with the whole amount at month 0, so its value is the amount times the index. Dollar-cost averaging invests at the start of each month from month 0, for the number of months you choose. Each installment is an equal share of the cash still waiting, so the first is the amount divided by the months and later ones include the interest the cash has earned. Waiting cash earns a monthly rate that compounds to the cash yield. The monthly investing value is the units bought times the index, plus any cash not yet invested. The difference is the lump sum value minus the monthly investing value at the end of the period.

Worked example using the default values

$50,000 invested at once at a 7% expected return grows to $98,358 after 10 years. Spreading the same $50,000 over 12 months, about $4,167 a month at first, with the waiting cash earning 4%, grows to $97,087, so investing the lump sum comes out ahead by $1,270. The waiting cash earns $910 of interest, but that is less than the growth it misses. If the market fell 10% in the first month, the lump sum would be worth $88,024 and monthly investing $96,226, so investing monthly would come out ahead by $8,202.

Interpreting the results

With a steady market, the lump sum wins whenever the expected return is higher than the cash yield, because each month money waits in cash it grows more slowly. The gap is usually small compared with the amount, because the waiting only lasts the first few months. Dollar-cost averaging wins when prices fall early, since later installments buy at lower prices. The market drop input shows how large a fall would need to be to change the verdict for your inputs. Neither outcome is known in advance, so the real question is how much an early fall would bother you, and whether a slower start would help you stay invested.

Practical tips

If you choose to spread the money out, set the schedule in advance and automate it, so the decision is not made again every month based on the news. Keep the waiting cash in a safe, interest-paying account rather than checking. Shorter spreads, such as three to six months, give up less expected growth than a year or more. If the money will go into a tax-advantaged account with an annual limit, the timing may be set by the limit instead. A sum you might need within a few years may not belong in stocks at all.

Limitations

Real markets do not grow in a straight line, and this calculator does not simulate random returns or the historical record; it shows one steady path, with an optional single fall at the start. It ignores taxes, trading costs and fund fees, and assumes the cash yield and expected return stay constant for the whole period. Dividends are assumed to be included in the expected return. The results are illustrations of how the two strategies respond to a given path, not a forecast of which will do better.

Frequently Asked Questions

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