Compound interest means returns can earn further returns. The starting balance grows, interest is added, and the next period’s calculation uses the larger amount. This makes time an influential part of long-term saving.
The growth formula
For a single deposit, the standard formula is A = P(1 + r/n)^(nt). P is principal, r is the annual rate, n is the number of compounding periods per year and t is time in years. Regular contributions are modeled as a stream of deposits with different growth periods.
Use realistic assumptions
Investment returns are uncertain, fees and tax can reduce growth, and inflation changes purchasing power. Run more than one rate scenario rather than treating a single projection as a promise.
Explore the effect of time and contributions with the Compound Interest Calculator.