What is compound interest?
Compound interest is what happens when the interest an amount of money earns is added back to that amount, so future interest is calculated on a bigger balance each time. Over long periods, this compounding effect can account for a large share of total growth — often more than the money you actually contributed.
The formula, in plain language
For a lump sum with no further contributions, the future value is:
A = P × (1 + r/n)^(n × t)
- A — the future value (what your balance grows to)
- P — the principal (your starting amount)
- r — the annual interest rate, written as a decimal (7% = 0.07)
- n — the number of times interest compounds per year
- t — the number of years
When you add a regular monthly contribution, the calculator adds that recurring amount into the balance at each compounding period before applying that period's interest, then repeats the process for every remaining period.
Worked example
Suppose you start with $10,000, add $200 a month, earn a 7% annual rate compounded monthly, over 20 years:
- Monthly rate: 7% ÷ 12 = 0.5833%
- Total periods: 12 × 20 = 240 months
- Total contributed: $10,000 + ($200 × 240) = $58,000
- Future value: roughly $145,180
- Interest earned: roughly $87,180 — more than the total amount contributed
Try these exact numbers in the calculator above to see the full year-by-year breakdown.