Compound interest is the reason putting away a little, early, beats putting away a lot, late. It’s a simple idea with a surprising payoff — and this tool shows it to you one year at a time.
The idea: earning on your earnings
With simple interest you earn only on the money you first put in. With compound interest you also earn on the interest you’ve already made, because it stays there and keeps working. The Consumer Financial Protection Bureau puts it in one line: you earn interest “on the money you’ve saved and on the interest you earn along the way.”
Their tiny example makes it concrete. Start with $1,000 at 5% a year: the first year you earn $50 and your balance is $1,050. The second year, the 5% is charged on the larger balance, so you earn $52.50 — and that extra $2.50 is “interest on interest.” It sounds trivial. Repeated for decades it becomes a landslide: the growth isn’t a straight line, it’s a curve that keeps getting steeper. That’s why compounding rewards time even more than it rewards the amount.
How it works
For anyone who wants the math, it’s two pieces added together. A starting amount grows
like P · (1 + r)ⁿ, where r is the rate per period and n is the number of periods.
Regular contributions add an annuity worth C · ((1 + r)ⁿ − 1) ÷ r. This calculator
doesn’t trust closed-form shortcuts: it simulates period by period, so the year-by-year
table is exact and every row reconciles.
An example
Take the values already filled in above. Start with $10,000, add $200 a month, assume a 7% annual return, and leave it for 20 years. It grows to about $144,600. Of that, only $58,000 is money you actually put in — the other $86,600 is growth. More than half the final number isn’t yours; the years made it. Now push the horizon to 25 years and it jumps to about $219,000. Those extra five years add more than the first twenty of your own contributions — that’s the curve showing its muscle.
The part that matters
This isn’t a forecast, and it shouldn’t be read as one. Three honest things:
- It assumes a constant return. A real investment doesn’t sit still — some years it rises, some years it falls, and a bad stretch early on hurts more than the average suggests. Treat the result as the shape of the time effect, not a number you’ll hit.
- It’s before taxes and inflation. Investment gains are usually taxed, and inflation quietly erodes what your future dollars can buy, so the real, spendable result is smaller than the headline. Lowering the rate by a couple of points is a rough way to picture “after inflation.”
- The rate is your guess. Change it and watch the answer swing — that sensitivity is the honest part. A calculator can’t tell you what markets will do; it can only show you what your assumption implies.
The underlying message holds up, though: start as early as you can, and be consistent. The math does the rest. Change the numbers above to match your own situation and watch where the curve takes you.