How Compound Interest Works
Understand interest on interest, contribution timing, compounding frequency and what a projected balance means.
The simple idea behind compounding
Compound interest means that growth is added to a balance and can then generate more growth. A savings account may credit interest to your deposit; a hypothetical investment forecast models reinvested returns. Neither should be confused with a promise that the rate will stay constant.
For a single lump sum, the familiar future-value formula is FV = P × (1 + r/n)^(n×t), where P is the starting amount, r the annual nominal rate, n compounding periods per year and t years.
Why monthly deposits change the picture
Contributions grow at different lengths of time. Your first deposit has more periods to compound than your last one. A monthly contribution made at the beginning of the month earns one extra month of assumed growth compared with an end-of-month contribution.
Compare two scenarios with the same starting balance and rate, but different monthly contribution amounts. The money you contribute is separate from growth earned on that money.
What to check before using a result
Confirm whether the entered rate is nominal APR, APY or a hypothetical average investment return. A consistent monthly rate matters. Savings account yields are variable, while stock market returns do not arrive smoothly each month.
- Separate deposits from estimated growth.
- Check whether the calculation uses start- or end-of-period deposits.
- Use several rate assumptions rather than a single optimistic forecast.
Further reading and primary sources
These external references explain related financial concepts and rules. They do not verify your personal calculation.