How compound interest works
With compounding, each period's interest is added to capital and earns interest in later periods. The longer the horizon, the larger the share of interest-on-interest in the final value.
The return here is a fixed assumption you choose. Actual returns on risky assets vary from year to year and can be negative.
Formula
- FV = P·(1 + r/n)^(n·t) + PMT·[((1 + r/n)^(n·t) − 1) ÷ (r/n)]
- P: starting capital · r: annual return · n: compounding periods per year · t: years
- PMT: contribution per compounding period = Monthly contribution × 12 ÷ n
Assumptions
- The return stays constant for the whole horizon.
- Contributions are credited at the end of each compounding period.
- Inflation, taxes, management and trading fees are ignored.
- The result is an illustration, not a return forecast.