How compound interest works
Compound interest means you earn returns on your past returns, not just on the money you put in. In the early years most of your balance is your own contributions. Give it enough time and the interest starts doing most of the work — that’s the upward bend in the chart.
- Time matters most. At 7%, money roughly doubles every 10 years (see the Rule of 72), so the last decade often adds more than the first two combined.
- Any field can be the question. Clear the goal to see what you’ll end up with, clear the contribution to find the monthly savings you need, or clear the rate to see the return a plan depends on.
- Inflation is optional. Add an inflation rate under “More options” to see what the final balance is worth in today’s dollars.
The compound interest formula
FV = P × (1 + i)N + PMT × [((1 + i)N − 1) ÷ i]
P is the starting amount, PMT the regular contribution, i the interest rate per contribution period, and N the number of periods. Solving for years uses logarithms. A required rate of return has no exact formula, so it’s found with a bisection search that can’t run away or loop forever. Details are on the methodology page.
Does monthly vs. daily compounding make a big difference?
Less than you’d think. A 7% rate compounded annually yields 7.00%; monthly yields about 7.23%; daily about 7.25%. The rate itself and the time you stay invested matter far more.
What return should I assume?
For a broad U.S. stock index, long-run history is about 10% a year before inflation and 6–7% after (see the S&P 500 return calculator). Savings accounts and CDs pay their stated rate. Using a conservative number gives you margin for bad decades.