How compound interest works
With compound interest you earn interest not just on the money you put in, but also on the interest you have already earned. Each month the interest is added to your balance, and the next month’s interest is calculated on that larger amount. Left to run for years, this compounding turns steady saving into noticeably faster growth.
The growth formula
Your initial deposit grows by
P · (1 + r)ⁿ, where r is the monthly rate
(the annual rate divided by twelve) and n is the number
of months. Each monthly contribution grows in the same way for as
long as it stays invested, and the two parts add together to give the
future balance.
Contributions versus interest
The total contributions are simply your initial deposit plus every monthly payment. The interest earned is the future balance minus those contributions — the part that compounding added for free.
This is a projection assuming a fixed annual rate compounded monthly. Real rates vary and investment returns are not guaranteed.