IRR (internal rate of return) is the annualized return that accounts for when your money was actually invested. When you add $200 a month to an investment over 10 years, some dollars were invested for the full 10 years, some for 5, and some for only a few months. CAGR ignores that timing entirely; IRR does not.
The calculator uses monthly bisection on NPV=0 — the same method investment analysts use — to find the rate that sets the present value of all your outflows equal to the present value of your final balance. Enter your initial investment, monthly contribution, years, and ending value; the IRR appears instantly.
When CAGR fails and IRR is the right tool
CAGR is correct for a single lump sum: $10,000 invested once, held for 5 years, growing to $18,000. But if you invested $5,000 initially and then $200 every month for 10 years, CAGR cannot be used meaningfully — there is no single "start value" to anchor to. IRR is the correct measure because it discounts each cash flow at the rate that makes NPV equal to zero.
The most important case where CAGR misleads is dollar-cost averaging (DCA). If you contribute $500/month to an index fund, a large contribution made in a bear market gets the full subsequent recovery; a contribution made at a peak does less well. IRR weights each contribution by its outcome, giving a more accurate picture of your personal investment experience.
How the IRR calculation works
The algorithm finds the monthly rate r that satisfies: initial outflow + Σ (monthly contributions / (1+r)^t) = final value / (1+r)^T. This is solved numerically via bisection — trying rates between a very low and very high bound, halving the range at each step until the NPV difference is below a tolerance threshold. The monthly rate is then annualized: (1 + monthly IRR)^12 − 1.
This is computationally intensive to do by hand but trivial for a computer. The calculator runs 50–100 bisection iterations to converge to 6 decimal places of precision — well beyond the accuracy of any estimated input value.
IRR in real estate and private equity
IRR is the dominant performance metric in real estate and private equity because those investments always involve irregular cash flows: the initial purchase, renovation costs, rental income, and a final sale. A property bought for $300,000 with $50,000 in renovations, renting for $2,000/month for 8 years, then sold for $600,000, has an IRR that CAGR cannot calculate at all.
Private equity funds report IRR as their headline figure precisely because it incorporates the timing of capital calls and distributions. A fund with a 20% IRR that deployed capital slowly (few early calls) may have actually produced less absolute wealth than a fund with 15% IRR that deployed capital quickly. IRR is a rate, not a dollar amount — both measures are useful in context.
Frequently asked questions
What is the difference between IRR and CAGR?
CAGR is the annualized rate for a single lump sum, ignoring contribution timing. IRR is the money-weighted annualized return that accounts for when each dollar was invested. For a single lump sum with no subsequent contributions, they are identical. When you make multiple contributions over time, only IRR accurately measures your personal return.
What is a good IRR for an investment?
Benchmarks vary by asset class. For public equities (stocks), matching the S&P 500 long-run IRR of ~10% nominal is considered solid. For real estate, 8–12% unlevered IRR is typical for good commercial deals; 15–20%+ for value-add or development. For private equity funds, 20%+ gross IRR is the benchmark, though net-of-fees performance is often much lower.
How do I calculate IRR by hand?
You cannot efficiently calculate IRR by hand for investments with many cash flows — it requires an iterative numerical process. In Excel, use =IRR() or =XIRR() (XIRR handles irregular intervals). In financial calculators, use the NPV/IRR workflow. The calculator above does it automatically — enter your starting investment, monthly contributions, years, and final value.
What is the difference between money-weighted and time-weighted return?
Money-weighted return (IRR) reflects your personal investment experience — larger positions during strong performance periods make your money-weighted return higher. Time-weighted return strips out the effect of contribution timing to measure the fund's performance independent of cash flows. Fund managers typically report time-weighted returns (since they don't control when clients invest); individual investors' actual experience is better captured by money-weighted return.
Worked examples
Each result is computed by the same engine that powers the calculator. Return assumptions are historical averages or user-supplied planning figures — not predictions.
Monthly DCA into index fund
$5,000 initial, $500/month for 8 years. Portfolio now worth $91,000.
- Starting value
- $5,000
- Ending value
- $91,000
- Holding period
- 8 yrs
- Total ROI
- 1720.0%
- Monthly contribution
- $500/mo
- Money-weighted IRR
- 12.21%
With regular contributions, CAGR understates performance (it ignores that later dollars had less time to grow). The money-weighted IRR reflects the actual return earned on the money actually at risk at each point in time — the honest measure for a dollar-cost-average investor.
Lump sum only — IRR equals CAGR
$20,000 lump sum, no additional deposits, grown to $44,000 over 9 years.
- Starting value
- $20,000
- Ending value
- $44,000
- Holding period
- 9 yrs
- Total ROI
- 120.0%
With no mid-period contributions, CAGR and IRR are identical — both reduce to (End/Start)^(1/Years) − 1 = 9.15%. IRR adds complexity only when cash flows in or out at different times.
More questions answered
What is IRR and when should I use it instead of CAGR?
IRR (internal rate of return) is the annualized rate that sets the net present value of all your cash flows to zero — effectively the money-weighted return. Use IRR instead of CAGR whenever you made multiple contributions or withdrawals along the way. CAGR measures a single starting investment to a single ending value; IRR accounts for the timing of every deposit and withdrawal. This calculator computes IRR automatically when you enter monthly contributions.
Why does my IRR differ from the fund's quoted return?
Funds typically quote time-weighted return (TWR), not money-weighted return (IRR). TWR eliminates the effect of when you contributed or withdrew, making it a fair measure of the manager's performance. IRR reflects YOUR actual experience — it is lower than TWR if you added money before a downturn, or higher than TWR if you added money before a rally. Both are valid, they answer different questions.
What is a good IRR for an investment?
The same benchmarks apply as for CAGR: broad equity portfolios average ~10% nominal IRR over long periods; balanced portfolios ~7–8%; bonds ~4–5%. In private equity, IRRs of 15–25% are common targets, but those figures carry high illiquidity risk and survivorship bias in reported data. Always compare IRR to the appropriate benchmark for the same risk class.