How compound interest works
Understand contributions, reinvestment and the assumptions behind growth.
The main idea
Final capital combines the money you start with, the deposits you add and any accumulated return. Reinvesting returns means that those returns can themselves earn returns later. Time therefore changes more than the number of contributions.
Prepare your inputs
Start by setting the rate to zero. This gives you initial capital plus deposits. Then try a hypothetical rate and compare the difference. This separates your own saving effort from growth attributed to the rate assumption.
A worked example
With €1,000 and 5% annual compounding, no deposits and no costs, the first year ends at €1,050 and the second at €1,102.50. The extra €2.50 in year two comes from earning interest on the first year’s interest.
How the model works
Contribution timing matters. A deposit at the end of the month starts earning in the following month. The calculator supports monthly and yearly deposits; compare frequencies using equivalent total annual deposits.
What to watch for
A nominal annual rate compounded monthly is not the same as an effective annual rate. Inflation is another separate effect: it reduces what the final money could buy. Taxes and investment fees can reduce the amount available as well.
Review your decision
Test lower returns, smaller deposits and a shorter horizon. A constant rate makes scenarios comparable; it does not predict market returns. Focus on the assumptions you can control and check whether the plan still makes sense in a less favourable case.