Compound Interest Calculator

How to use Compound Interest Calculator

1. Enter your starting balance, monthly contribution, expected annual return and time horizon.
2. Set the compounding frequency and an inflation assumption.
3. Read the projection, the contribution-versus-growth split, and the year-by-year table.

How compounding actually works

The formula for a lump sum is A = P(1 + r/n)^(nt) — principal, annual rate, compounds per year, years. With regular contributions you add the future value of an annuity on top:

A = P(1 + r/n)^(nt) + PMT × [((1 + r/n)^(nt) − 1) ÷ (r/n)]

The behaviour that surprises people is how late most of the growth arrives. £500 a month at 7% for 30 years produces about £566,000, of which £180,000 is contributions and £386,000 is growth. But in the first decade growth is only about £70,000 — the curve is nearly flat early and steep late, which is why starting early beats contributing more.

Ten years of £500/month starting at 25 and then nothing until 55 beats £500/month from 35 to 55, despite being half the money. That is the entire argument for early contributions, and it is arithmetic rather than advice.

Does compounding frequency matter?

Less than people expect. Going from annual to monthly compounding at 7% raises the effective annual rate from 7.00% to 7.23% — worth having, and not worth choosing a worse product for.

The gap between daily and continuous compounding is 0.001 percentage points — the limit is reached almost immediately. When comparing accounts, use the stated effective rate: APY in the US, AER in the UK. Both already fold compounding in, which is exactly why they are the required disclosure.

Why the inflation-adjusted figure is the real one

A projection of £566,000 in thirty years is not £566,000 of today’s money. At 2.5% inflation it buys roughly what £270,000 buys now.

This calculator shows both, because the nominal number is the one that feels good and the real number is the one you can plan with. A "7% return" in a market averaging 2.5% inflation is a 4.4% real return — and the compounding formula applied to the real rate is what tells you about future purchasing power.

Central bank targets are 2% in the US, UK and eurozone; long-run realised inflation has run somewhat above that. The Gulf states peg to the dollar and broadly track US inflation. Using 2.5% is a reasonable planning assumption and 3% is a conservative one.

What return should you assume?

This is where projections go wrong, and it is worth being conservative deliberately.

Long-run historical returns, nominal and before fees: global equities roughly 8–10%, US equities roughly 10%, a 60/40 portfolio roughly 7–8%, government bonds roughly 4–5%, cash roughly 2–3%. Subtract inflation for the real return and subtract fees again.

Fees deserve their own line. A 1% annual fee on a 30-year projection removes around 25% of the final balance, because it compounds against you exactly as returns compound for you. This is the single largest controllable variable in the whole calculation, and a 0.2% index fund versus a 1.2% managed fund is a bigger decision than most contribution changes.

Sequence matters too. These formulas assume a smooth annual return; real markets do not deliver one. Two portfolios with identical average returns can end very differently depending on when the bad years fell — which matters most in the years just before and after you start drawing down.

Frequently asked questions