Compound interest is interest calculated on both your original principal and on the interest you’ve already earned. Over time, this “interest on interest” effect can dominate your returns.
The core formula
A = P × (1 + r)^(n×t) Where P = principal, r = annual rate (as a decimal), n = compounds per year, and t = years.
Why compounding frequency matters
If you compound more frequently (monthly vs yearly), you’re applying the growth step more times per year. The difference is usually small for common rates, but it becomes noticeable as time grows.
What monthly contributions do
Many real-world plans include regular deposits. Contributions increase total invested and can massively accelerate growth because earlier deposits have more time to compound.
A quick example
Suppose you invest $10,000 at 10% annual return, compounded monthly for 5 years. If you also contribute $200 per month, your ending value becomes much higher than the “no contributions” case.
Use our Compound Interest Calculator to test different rates, years, compounding, and monthly contributions: