How compound interest works
Compound interest earns interest on your interest. Each period the balance is multiplied by (1 + the periodic rate), so growth accelerates — the longer the horizon, the more dramatic the curve.
- A — future value
- P — starting amount
- i — rate per period = annual rate / periods
- n — total periods = years × periods/yr
- C — contribution added each period
Common values
| Starting amount | Future value |
|---|---|
| 100,000 | 164,701 |
| 250,000 | 411,752 |
| 500,000 | 823,505 |
| 1,000,000 | 1,647,009 |
| 1,500,000 | 2,470,514 |
| 2,000,000 | 3,294,019 |
| 3,000,000 | 4,941,028 |
| 5,000,000 | 8,235,047 |
| 10,000,000 | 16,470,095 |
More detail
Why compounding frequency matters
Compounding monthly instead of yearly means interest is added — and starts earning its own interest — sooner. The effect is small at low rates and short horizons, but grows with both. Daily compounding is the practical ceiling for most accounts.
The power of time
Because growth is exponential, the last years contribute far more than the first. Starting earlier beats contributing more later: a smaller sum left to compound for longer often overtakes a larger sum with less time.
Investing tip. Regular contributions matter most early, when they have the longest time to compound. Automating a fixed monthly amount turns time itself into your biggest asset.
Frequently asked questions
How much difference does compounding frequency actually make?
For a typical savings rate, switching from yearly to monthly compounding adds well under 1 percentage point of effective annual yield — for example 5% compounded yearly is exactly 5%, but 5% compounded monthly works out to about 5.12%. Switch "Compounding" above to see the exact gap for your own numbers.
Why does the future value grow so much faster in later years?
Because interest is earned on interest — each period's balance, not just the original principal, earns the next period's interest. That's why the formula A = P·(1+i)ⁿ is exponential in n: the curve stays flat-looking early on and then steepens sharply in the final years.
Should I add a monthly contribution or a lump sum?
Both grow under the same compounding, but a lump sum invested today has the maximum possible time to compound, and the gap is not small — at 5% for 10 years compounded monthly, 13,000,000 invested at once grows to 21,411,123, while the same total paid in as 120 monthly instalments of 100,000 reaches only 17,175,237, about 20% less. In practice, use whichever amount you can actually commit to; a smaller amount contributed consistently usually beats a larger one delayed.