# Understanding Percentage Changes: A Beginner’s Guide

Summary:

The percentage change formula calculates how much something has changed in relation to its original value. Understanding percentage changes is a fundamental concept in personal finance and business that allows you to make better financial decisions. Percentage changes can be used to compare the performance of different investments, evaluate pricing strategies, analyze loan offers, and negotiate salaries effectively. In addition, percentage changes help you to budget effectively, plan for inflation, and achieve your financial goals.

If you’ve ever calculated the price increase of a product, the percentage discount on a sale, or the investment return on a stock, you’ve likely come across the concept of percentage changes. Expressing changes in percentages is a powerful tool in personal finance and business, allowing you to make informed decisions based on how much something has changed in relation to its original value.

In this beginner’s guide, we’ll take a closer look at what percentage changes are, how to calculate them, and why it’s essential to understand them. Whether you’re a seasoned investor or just starting to take charge of your finances, mastering the basics of percentage changes can help you make better financial decisions.

## What are percentage changes?

Percentage changes are a way of expressing how much something has changed in relation to its original value. It’s expressed as a percentage and calculated by dividing the change by the original value and multiplying by 100.

Percentage changes can be positive or negative, depending on whether the change represents an increase or decrease in value. Positive percentage changes indicate an increase in value, while negative percentage changes indicate a decrease in value.

## How to calculate percentage changes

Calculating percentage changes involves a simple formula that you can apply to any situation where you want to express how much something has changed in relation to its original value. The formula for calculating percentage changes is:

To calculate the percentage change, you need to know the old value (the original value) and the new value (the updated value). Once you have these values, simply plug them into the formula to get the percentage change.

Let’s take an example of a stock that was purchased for \$100 and is now worth \$150. The percentage change in the stock’s value would be:

This means that the stock’s value has increased by 50% from its original value of \$100.

It’s important to note that when the percentage change is negative, it means that the value has decreased. For example, if the same stock was now worth \$75 instead of \$150, the percentage change would be:

This means that the stock’s value has decreased by 25% from its original value of \$100.

## Financial decisions that involve percentage changes

Percentage changes are a fundamental concept in personal finance and business, and they’re used in a variety of financial decisions. Here are some examples of financial decisions that involve percentage changes:

1. Investing. When investing in stocks, bonds, or other assets, understanding the percentage changes in their value is essential. Investors often use the percentage change to evaluate the performance of their investments and make decisions about buying or selling.
2. Pricing. Pricing strategies often involve percentage changes. For example, if you’re offering a discount on a product, you need to know the percentage discount to calculate the new price accurately. Similarly, if you’re increasing the price of a product, you need to know the percentage increase to determine the new price.
3. Loans. Loans often involve interest rates, which are expressed as a percentage. The interest rate determines the percentage change in the amount owed over time. Borrowers need to understand the percentage change in their loan balance to make informed decisions about paying off the loan.
4. Inflation. Inflation is the percentage change in the general price level of goods and services over time. Understanding inflation is crucial for making financial decisions, such as saving for retirement or budgeting for expenses.
5. Salary negotiations. When negotiating a salary, knowing the percentage increase or decrease in the offer is helpful. Similarly, when comparing job offers, understanding the percentage difference in salary can help you compare two similar offers.

## Importance of understanding percentage changes

By understanding how to calculate and interpret percentage changes, you can make better financial decisions and achieve your financial goals.

1. Better decision-making. Percentage changes allow you to make better financial decisions by providing you with a clear understanding of how much something has changed in relation to its original value. Using this formula, you can evaluate investment performance, pricing strategies, loan offers, and salary negotiations more effectively.
2. Comparing investments. Percentage changes are often used to compare the performance of different investments. For example, if you’re considering two stocks, understanding their percentage changes over time can help you decide which stock is a better investment.
3. Budgeting. Percentage changes in expenses can impact your budgeting decisions. For example, if the cost of groceries has increased by 10%, you may need to adjust your budget accordingly to ensure you can cover your expenses.

While percentage changes may seem daunting at first, they’re actually straightforward once you understand the concept. By practicing and applying the calculations in real-world situations, you can quickly become proficient in using percentage changes in your financial decision-making.

Remember that percentage changes are just one tool in your financial toolkit. You should always consider other factors — such as risk, liquidity, and diversification — when making financial decisions. By using percentage changes in conjunction with other financial tools and strategies, you can achieve your financial goals and build a secure financial future.

## Key Takeaways

• Percentage changes allow you to make better financial decisions by providing a clear understanding of how much something has changed in relation to its original value.
• Using this formula can be used to compare investment performance, evaluate pricing strategies, analyze loan offers, and negotiate salaries effectively.
• Calculating percentage changes is simple, and with practice, you can become proficient in using them in your financial decision-making.
• Percentage changes are just one tool in your financial toolkit, and you should always consider other factors when making financial decisions.
###### View Article Sources
1. Percent change versus percentage-point change: What’s the difference? 4 tips for avoiding math errors — The Journalist’s Resource
2. Global Education — Our World in Data
3. World Bank Group Education — Federal Reserve