CAGR answers one question honestly: at what steady annual rate did this thing actually grow? It strips out the zigzags and gives you the single compounding rate connecting your start point to your end point.
How CAGR works
Growth compounds — each year's gain builds on the last. So the right "average" isn't the arithmetic mean of yearly returns but the geometric one, which is exactly what CAGR computes. $10,000 becoming $25,000 over 10 years is a total gain of 150%, but the CAGR is (25,000 ÷ 10,000)^(1/10) − 1 = 9.6% per year — not 15%.
Why the simple average lies
Imagine +50% one year and −50% the next. The "average return" is 0%, yet $1,000 becomes $1,500 and then $750 — a real loss of 25%, a CAGR of −13.4%. Volatility always drags the compound rate below the simple average, which is why CAGR is the standard for comparing investments, business revenue, or anything that grows multiplicatively.
The Rule of 72
Divide 72 by the growth rate to estimate doubling time: at 6% money doubles in about 12 years, at 9% in about 8. It's a mental-math approximation of the exact formula ln(2)/ln(1+r) and stays impressively accurate between roughly 4% and 15%. This calculator shows the Rule-of-72 estimate live alongside your CAGR.
CAGR vs other growth measures
Use CAGR for point-to-point growth over multiple years. For a single period, plain percentage change is enough. To project forward instead of measuring backward — contributions included — use the compound interest calculator. And remember CAGR's blind spot: it says nothing about the ride between the endpoints — a smooth 9.6% and a wild rollercoaster can share the same CAGR.
For information only; not investment advice.