How the Compound Interest Calculator Works
Compound interest is the engine behind almost every successful long-term investment plan. The basic idea is simple: each period, you earn interest not only on your original balance but also on the interest that has already accumulated. Over decades, this small-looking effect produces results that feel almost unreasonable.
The standard formula
A = P(1 + r/n)^(nt), where A is the future value, P is the principal, r is the annual rate as a decimal, n is the number of compounding periods per year, and t is time in years. For a $10,000 deposit at 7% compounded monthly for 20 years, that gives you about $40,387 - four times your starting balance with no extra contributions.
Adding contributions changes everything
The future value of monthly contributions is calculated separately using the future-value-of-an-annuity formula. Adding $500 a month for 20 years at the same 7% turns that $40,387 into about $300,000. The contributions matter more than the starting balance over the long term.
Realistic return assumptions
For long-term planning, 7% is a defensible nominal return for a diversified stock portfolio. HYSAs and CDs typically pay 4-5%. Treasury bonds average closer to 3%. Subtract 2-3% to get an inflation-adjusted (real) return if you want the result in today's dollars.
The starting-age effect
Run this scenario: $300/month from age 25 to 35 (then stop) vs $300/month from 35 to 65. The first person contributes only $36,000 vs the second person's $108,000, but at age 65 the first ends up with more money. Compounding rewards starting early more than it rewards saving more.