How Compound Interest Works
Last reviewed: 8 October 2026
Compound interest means growth can build on both the money you originally put in and growth already added. This makes time a major part of the calculation: two accounts with the same starting balance and rate can end very differently if one compounds for much longer.
The core formula
For a single lump sum, the standard formula is FV = PV × (1 + r)n. PV is the starting value, r is the rate per period, n is the number of periods and FV is the future value.
The formula separates three drivers: starting amount, rate and time. A higher rate can help, but more time also matters because later growth is applied to a larger balance.
Regular contributions
Monthly contributions do not all grow for the same amount of time. The first contribution may compound for years, while the final one may only compound for a month. A good calculator therefore treats regular deposits separately rather than simply adding them to the starting balance.
Compounding frequency
Interest can be compounded annually, monthly, daily or on another schedule. More frequent compounding can slightly increase the effective return when the quoted annual rate is the same.
What the result does not predict
Real investments do not usually grow at exactly the same rate every year, and savings rates can change. Fees, tax, inflation and withdrawals can also change the final amount. Treat the result as a planning illustration, not a guarantee.
Better way to use the tool
Compare several scenarios: a lower rate, a shorter period and a smaller contribution. If a goal only works under an optimistic assumption, that is useful information.