How compound interest works
Compound interest means earning interest on your interest — not just your principal. The longer money stays invested, the more each period's interest becomes the base for the next. This creates exponential growth that accelerates dramatically over time.
The formula for a lump sum is: FV = PV × (1 + r/n)nt, where PV is the principal, r is the annual rate, n is the compounding frequency per year, and t is years. This calculator extends that by adding monthly contributions, each of which also compounds from the date it is made.
Why the compounding frequency matters
The more frequently interest compounds, the higher the effective annual yield. Monthly compounding at 7% produces a 7.229% effective annual rate; daily compounding produces 7.250%. The difference is small at lower rates but meaningful over long periods and large balances.
Frequently Asked Questions
What does the rate variance do?
Entering a variance of, say, 2% with a base rate of 7% tells the calculator to also plot outcomes at 5% and 9%. The shaded band on the chart represents this range of possible futures — a simple way to visualize how sensitive your outcome is to the actual return you achieve.
What is a realistic long-term return to use?
The S&P 500 has returned roughly 10% annualized before inflation over the long run (≈7% after adjusting for inflation). A diversified portfolio might target 6–8% real return. For savings accounts and CDs, current rates can be found at your bank. Use the variance field to model a realistic range rather than a single point estimate.
Is the monthly contribution invested at the start or end of each month?
This calculator treats contributions as made at the end of each compounding period (ordinary annuity). If you contribute at the start of each period (annuity due), the actual final value will be slightly higher — by exactly one period's worth of interest on each contribution.
How does this differ from an ROI calculator?
This calculator focuses on the dollar value of your portfolio over time. The ROI calculator on CalcTitan takes the same inputs and instead shows your return as a percentage — absolute ROI (total gain / total invested) and annualized ROI (the compound rate of return on your total invested capital).