How compounding works
Each period your balance earns a return, and that return joins the balance. The next period earns on the larger amount. Repeated, it means growth accelerates: the same rate produces a bigger gain every year because it applies to more money.
P is the starting balance, C the contribution each period, i the rate per period and n the number of periods. The first term grows your existing money; the second grows everything you add along the way.
Worked example: $10,000 plus $500 a month for 20 years
At 7% compounded monthly, the balance reaches $300,851. Of that, $130,000 is money you put in and $170,851 is growth — so more than 57% of the final figure was never deposited. The $10,000 starting balance alone would have become $40,387; the monthly contributions did the rest.
Inflation is the counterweight. At 3% a year, $300,851 in 20 years buys what about $166,574 buys today.
What time does to the same contributions
| Years | Paid in | Growth | Balance |
|---|---|---|---|
| 10 | $70,000 | $36,639 | $106,639 |
| 20 | $130,000 | $170,851 | $300,851 |
| 30 | $190,000 | $501,150 | $691,150 |
| 40 | $250,000 | $1,225,521 | $1,475,521 |
$10,000 to start plus $500 a month at 7%. Doubling the time does far more than doubling the result.
Frequently asked questions
What is compound interest?
Interest earned on your interest. Each period's return is added to the balance, and the next period earns a return on the larger balance. At 7% a year, money doubles roughly every 10.2 years without you adding anything.
What does $500 a month grow into?
Starting from $10,000 and adding $500 a month at 7%, after 20 years the balance is $300,851. You would have paid in $130,000, so $170,851 of it is growth.
Why does starting earlier matter so much?
Because the last years are the biggest. The same $500 a month run for 30 years instead of 20 reaches $691,150 — $390,300 more, from only $60,000 of extra contributions.
Is 7% a realistic return?
It is a common long-run nominal figure for a diversified equity portfolio, and it is a default here, not a promise. Real returns vary year to year and can be negative for years at a time. Inflation also erodes the result: $300,851 in 20 years is worth about $166,574 in today's money at 3% inflation.
Related tools
- Paycheck calculator — the take-home pay these contributions come from
- Amortization schedule — the same compounding, working against you
- Credit card payoff — why clearing debt often beats investing