This is an illustration, not financial advice. Real savings rates change and investment returns go up and down. The calculator assumes one steady rate and ignores taxes, fees and inflation.
How the calculator works
The calculator runs month by month. It converts your annual rate and compounding choice into an equivalent monthly rate, adds interest to the balance, and adds your contribution at the start or end of each month. Contributions made at the start of the month earn one extra month of interest each time.
Compounding frequency sets how often interest is added. More frequent compounding turns the same stated rate into a slightly higher effective yield (APY). A 7% rate works out to 7.00% APY compounded annually, 7.19% quarterly, 7.23% monthly and 7.25% daily.
monthly rate i = (1 + rate ÷ n)n ÷ 12 − 1
each month: balance = balance × (1 + i) + contribution
total interest = final balance − deposit − all contributions
With monthly compounding and end-of-month deposits this matches the classic future value formula: FV = P(1 + i)m + C × ((1 + i)m − 1) ÷ i, where m is the number of months.
Example: $10,000 plus $500 a month at 7% for 20 years
Start with $10,000, add $500 at the end of every month, and earn 7% compounded monthly (a monthly rate of 0.5833%).
| Year | Balance | Interest that year |
|---|---|---|
| 1 | $16,919 | $919 |
| 5 | $49,973 | $3,148 |
| 10 | $106,639 | $6,968 |
| 15 | $186,971 | $12,383 |
| 20 | $300,851 | $20,061 |
The final balance is $300,850.72. You put in $130,000 ($10,000 plus 240 × $500), and total interest is $170,850.72, more than you contributed. In year 20 alone, interest adds more than $20,000, over three times the $6,000 you deposit that year.
Switching to start-of-month contributions raises the total to $302,370.09. Switching to annual compounding instead lowers it to $292,465.03.
What makes the biggest difference
Time
Half of the example's final balance builds up in the last seven years. Starting five years earlier often matters more than finding a slightly higher rate.
Rate
Small rate differences compound too. The Rule of 72 gives a quick check: divide 72 by the rate to estimate how many years a lump sum takes to double. At 7% that's about 10 years; at 4%, about 18.
Contributions
Regular deposits drive most of the growth in the early years. Automating a transfer on payday keeps it going without effort.
Tips for using the results
- Match the rate to the account. Savings accounts and CDs quote APY; enter it with annual compounding to avoid double-counting.
- Think in today's dollars. To account for inflation, subtract an expected inflation rate from your return before entering it.
- Remember taxes. Interest in a regular savings or brokerage account is taxable each year. Tax-advantaged accounts such as a 401(k) or IRA let the full amount compound.
- Try a lower rate too. Planning around a cautious rate means good years are a bonus, not a requirement.
Frequently asked questions
How does compound interest work?
You earn interest on your deposits and on the interest already added to your account. Each period's interest becomes part of the balance, so the next period's interest is a little larger. Over long stretches, interest can end up being more than everything you put in.
Does compounding frequency matter much?
Less than most people expect. At 7% for 20 years with $10,000 up front and $500 a month, daily compounding ends about $9,000 higher than annual compounding on a balance of roughly $300,000. The rate, the amount you add and the time you leave it matter far more.
What is the difference between APR and APY?
APR is the stated annual rate before compounding. APY includes compounding, so it shows what you actually earn in a year. A 7% APR compounded monthly is about a 7.23% APY. Savings accounts usually quote APY; if you enter an APY here, choose annual compounding.
What rate of return should I use?
Use the APY for savings accounts and CDs. For stock investments, returns vary year to year and are never guaranteed. Many people test a cautious long-run figure such as 5% to 7% after inflation, and also try a lower rate to see a worse case.
What is the Rule of 72?
Divide 72 by the annual rate to estimate how many years it takes money to double with no further deposits. At 7%, a single deposit doubles in roughly 10 years; at 4%, about 18 years.
This calculator gives estimates for planning. Check current rates and product labels before you buy, list or file.