What is compound interest?
Compound interest means you earn returns not only on the money you put in, but also on the returns you have already earned. Over long periods, this “interest on interest” can become larger than the contributions themselves.
The formula
For a single deposit, the future value is P × (1 + r/n)^(n × t), where P is the starting amount, r is the annual rate, n is how many times per year interest compounds, and t is the number of years.
This calculator also adds a contribution at the end of every month and grows each one from the month it is added. For example, $10,000 plus $500 a month at 7% a year compounded monthly grows for 20 years; the result shows how much of the final balance came from your deposits and how much from growth. Other calculators may add contributions at the start of each month instead, which gives a slightly higher result.
What rate should I use?
For a savings account or CD, use its stated annual percentage yield. For stock investments, returns vary every year and can be negative, so many people test several rates (for example 4%, 6% and 8%) to see a range of outcomes rather than relying on one number.
What the calculator leaves out
- Taxes on interest, dividends or gains
- Fund fees and trading costs, which reduce your effective return
- Inflation, which lowers what the future balance can buy
- Years with losses: real returns are not steady