What is compound interest?
Compound interest means you earn interest on your interest. Each period, your returns are added to the balance, so the next period's returns are calculated on a larger amount. Over long periods this snowball effect is the main reason investing early matters so much.
P is your starting amount, r the annual rate, n the number of compounding periods per year and t the number of years. This calculator adds monthly contributions and can raise them each year, as many people do when their salary grows.
The Rule of 72
To estimate how long it takes money to double, divide 72 by the annual return. At 7%, money doubles in about 10 years. At 10%, it takes about 7.2 years.
Why starting early beats investing more
Someone who invests $300 a month from age 25 to 35 and then stops can end up with more at 65 than someone who invests $300 a month from 35 to 65, because the early money compounds for an extra decade. Change the Years field to see the effect on your own numbers.
Nominal vs. real returns
A balance 30 years from now will buy less than the same amount today. The "in today's dollars" figure divides your result by cumulative inflation so you can judge its real purchasing power.
Frequently asked questions
What return should I use?
Many people use 6% to 8% for a diversified stock portfolio over long periods, and 3% to 5% for high-yield savings or bonds. Past returns do not guarantee future results, so try several rates.
Does compounding frequency matter much?
A little. Daily compounding earns slightly more than monthly or yearly at the same rate, but the difference is small compared with the effect of the rate, your contributions and time.
Are taxes included?
No. Returns in taxable accounts may be reduced by taxes on interest, dividends and gains. Accounts like a 401(k), IRA or Roth IRA can shelter growth from taxes.
How much will $500 a month grow in 20 years?
At a 7% annual return compounded monthly, $500 a month grows to roughly $260,000 in 20 years, with $120,000 of that coming from your contributions. Enter your own numbers above for an exact figure.
For illustration only. Investment returns vary and are not guaranteed. This is not financial advice.