How compound interest works, with regular contributions
Compound interest is interest earning interest. The longer it runs, the more of your balance comes from growth rather than deposits.
With simple interest you earn on your original amount only. With compound interest the interest is added to the balance and earns interest too. Regular contributions give it more to work with.
Worked example: $10,000 plus $500 a month at 6% for 20 years
| Item | Amount |
|---|---|
| Total you put in | $130,000 |
| Final balance | $264,122 |
| Interest earned | $134,122 |
| Final balance in today's dollars (2.5% inflation) | about $161,186 |
Does compounding frequency matter?
Only a little. $10,000 at 6% for 20 years becomes $33,198 with daily compounding and $32,071 with yearly compounding, a difference of about 3.5%. A higher rate, a longer time or a larger regular contribution makes far more difference.
Inflation and fees
Prices rise over time, so $264,122 in 20 years buys less than $264,122 today. Dividing by (1 + inflation) for each year shows what it is worth in today's dollars. Fees and tax also reduce real returns, and returns on shares or super are not steady, so treat any projection as a rough guide.
✨ Key Takeaways
- Time and regular saving matter most.
- Compounding frequency matters little.
- Look at the result in today's dollars.
- Fees, tax and uneven returns reduce real results.
Open the compound interest calculator →