How it works
Compound interest formula with monthly contributions:
FV = P(1+r)^n + PMT × [((1+r)^n − 1) / r]
Where FV is future value, P is starting principal, r is the monthly return rate, n is the number of months, and PMT is the monthly contribution.
The first half compounds your initial deposit. The second half is the future value of your monthly deposits, growing at the same rate.
What to know
- Time is the biggest lever. $200 a month at 7% becomes $244,000 in 30 years but only $104,000 in 20 years. Doubling time more than doubles the result.
- Use realistic return assumptions. The S&P 500 has averaged about 10% nominal, 7% after inflation. Use 7% for conservative planning.
- Fees compound too. A 1% expense ratio over 40 years can eat 25% of your final balance vs a 0.05% index fund.
- This is pre-tax. Inside a Roth IRA the result is yours. In a taxable account, capital gains tax reduces what you keep.
Worked example
Starting with $1,000, contributing $200 a month at 7% annual return for 30 years:
- Total contributed: $73,000 ($1,000 + $72,000)
- Total interest earned: $171,000
- Final balance: $244,000
About 70% of the final balance is interest, not your contributions. That is the power of compounding over decades.
Frequently asked questions
What is a realistic annual return?
For a globally diversified stock portfolio, 7% real (after inflation) is a defensible long-term assumption. The US stock market has done about 10% nominal historically. International markets have done less.
Should I use real or nominal returns?
Use real (inflation-adjusted) returns if you are thinking in today's dollars. Use nominal if you want the raw future number. Both are valid, just be consistent.
What is the rule of 72?
A shortcut: divide 72 by your return rate to get the years to double. At 7%, money doubles every ~10 years. At 10%, every ~7 years.
Does monthly compounding really beat annual?
Slightly. Monthly compounding adds about 0.1% per year of extra return at typical rates. Real-world investments compound continuously through reinvested dividends, so the effect is automatic.