How Compound Interest Works
Compound interest means each period's interest is added to your balance, and the next period's interest is calculated on that bigger balance. Early on the effect looks small; over years it becomes the dominant force in your account. Albert Einstein probably never called it the eighth wonder of the world, but the nickname stuck for a reason.
The Contribution Effect
The starting amount matters less than most people think — steady contributions matter more. $5,000 at 5% for 10 years grows to about $8,235 alone, but add $200 a month and you end near $39,300. This calculator compounds monthly and adds your contribution at the end of each month.
Using It for Real Decisions
- Model a savings account or CD: use the APY as the rate, set contributions to zero for a CD.
- Model long-term investing: use a conservative average return, and remember real markets fluctuate — this projects a smooth path.
- Compare scenarios: run it twice (different rate or contribution) and compare final balances.