At 7%, $500 a month becomes $280,657 over 20 years — of which $155,657 is interest the market earned for you.
What compound interest actually means for you
Compound interest means your returns start earning returns. The growth curve is not straight: early on, most of your balance is the money you put in, and interest is a small addition. Later, the interest portion takes over, and the balance starts climbing faster than your contributions.
That is why starting earlier beats contributing more. Money invested for 40 years has three times as long to compound as money invested for 20. The difference in outcomes is usually far larger than the difference in monthly contribution that caused it.
How to use it
- Starting amount. Whatever you already have invested or saved for this goal. Enter zero if you are starting from scratch.
- Monthly contribution. What you add each month. Set it to something you would still be doing after a bad quarter, not a peak month.
- Annual interest rate. This is the expected annual return, not the interest rate on a savings account. A diversified stock portfolio has historically averaged around 7% nominal over long periods, but returns in any given decade can be very different — treat this as a scenario, not a promise.
- Years. The longer the horizon, the more compounding does. Try 10, 20, and 30 to see how sensitive the result is to time.
The formula
The future value of a starting amount compounded monthly is FV = P × (1 + r/12)^(12t). Adding monthly deposits of M gives FV = P × (1 + r/12)^(12t) + M × [((1 + r/12)^(12t) − 1) / (r/12)], where r is the annual return and t is the number of years.
What the projection leaves out
Three things move the real answer away from this figure, and they all work against you. Taxes: a taxable account gives up part of each year’s return, which is why the same gross return produces a smaller balance over twenty years than the projection shows. Fees: a fund charging 1% annually does not reduce the result by 1%, it reduces it by far more over time, because the fee compounds too. Inflation: $280,000 in twenty years buys less than $280,000 today, and the projection is in nominal dollars.
The order of contributions matters less than people think, but the order of returns matters more. Two investors who both average 7% over twenty years can end with materially different balances if one has the good years early and the other has them late — because the early money is the money that compounds longest.
This is why the calculator is most useful as a comparison tool rather than a forecast. Change one input at a time and watch which lever moves the answer most. For most people at most horizons it is time, then contribution, then rate — and time is the only one you cannot buy back later.
Frequently asked questions
How much do I need to invest to reach a goal?
Work backwards from the target using the savings goal calculator, which solves for the monthly contribution instead of the ending balance.
What is a realistic return to assume?
For a diversified stock portfolio, long-run nominal returns have averaged near 7% annually, though no decade matches that and inflation erodes roughly a third of it. For a savings account, current rates around 4% are realistic. Run the numbers at several rates to see how sensitive the outcome is.
Does the calculator account for taxes or inflation?
No. It works in nominal dollars. If you are comparing against a goal that will be spent much later, adjust your target for inflation separately.