How compound interest works
Compound interest means you earn interest not only on the money you deposit, but also on the interest that money has already earned. Each period, the interest is added to your balance, and the next period's interest is calculated on that larger balance. Over short periods the effect is modest; over decades it is dramatic — which is why starting early matters more than starting big.
The formula this calculator uses
With monthly compounding and monthly deposits made at the end of each month, the future value is:
FV = P·(1+i)n + PMT·[((1+i)n − 1) / i]
- P — your starting amount
- PMT — your monthly deposit
- i — the monthly rate (annual rate ÷ 12)
- n — the number of months
A worked example
Suppose you start with $10,000, add $200 every month, and earn 7% a year for 20 years. Your own deposits total $58,000. The projected balance is roughly $143,000 — meaning around $85,000, well over half of the final amount, is interest you never had to deposit. Run the same numbers over 10 years instead and interest makes up only about a third of the result. Time is the main ingredient.
Tips for using the result
- Use a realistic rate. A high-yield savings account might pay 4–5%; a diversified stock portfolio has historically averaged around 7–10% before inflation, but with large year-to-year swings.
- Think in real terms. Subtract expected inflation (around 2–3%) from your rate to see growth in today's purchasing power. Our inflation calculator can help.
- Consistency beats timing. The monthly deposit term usually ends up contributing more than the starting lump sum for ordinary savers.