Why the last years matter most
Compound growth is exponential, which means it is back-loaded. In a 30-year horizon at 7%, more than half the final balance is created in the final ten years, even though contributions are equal throughout. Starting early beats contributing more later, almost every time.
The second output separates deposits from growth, and that split is the honest measure of how much your money has actually worked. Early on, growth is a small slice of the total; the crossover point is where investing starts to feel like it is doing something.
The inflation-adjusted figure is the one to plan with. A nominal balance that looks impressive in forty years may buy far less than the number suggests, so always check the real figure before deciding whether a target is sufficient.
Why the rate matters more than the inputs
The compound growth formula is sensitive to the rate in a way that surprises people who use it for the first time. Doubling the time horizon more than doubles the result; doubling the rate multiplies the result several times over. Two investors who save the same monthly amount for the same number of years but earn different rates end up with dramatically different outcomes.
This is why the boring investor who targets a slightly higher expected return over decades tends to do dramatically better than the active investor who chases returns. Compounding rewards patience and consistency more than brilliance.
What the calculator does not include
Tax. Compounded returns are pre-tax. In most jurisdictions investment growth is taxed annually or upon realisation, and the after-tax compounded rate is meaningfully lower than the pre-tax rate. For long horizons the difference is substantial.
Inflation. The calculator shows nominal returns. Real purchasing power growth uses the inflation-adjusted rate — typically nominal rate minus inflation. At 7% nominal and 2% inflation, real growth is roughly 4.9% a year, not 7%. The gap compounds over decades.
Sequence of returns. The formula assumes a constant rate every year. Real markets do not deliver that. Volatility reduces the actual compounded return below the arithmetic average, an effect called volatility drag. For long horizons with regular contributions the effect is small; for retirees drawing down a portfolio it can be the difference between sustainability and depletion.
How to use it well
Run it twice: once with a rate you can defend (a diversified equity index, less a fee drag, less inflation) and once with a lower rate to see how much of the result depends on the assumption. If the two outputs diverge wildly, your plan is fragile to small changes in the rate, not just to big ones.
Formula
FV = P(1 + r/n)^(nt) + C × [(1 + r/n)^(nt) − 1] ÷ (r/n), with monthly compounding n = 12
FAQ
What return assumption should I use?
Broad equity markets have returned roughly 7-10% nominal over long periods; a balanced portfolio less. Using 7% nominal, or about 4-5% after inflation, is a common planning assumption. Being conservative is better than planning around a bull-market average.
Does this account for taxes and fees?
No — the figure is gross. Fees compound against you just like returns compound for you: a 1% annual fee over 30 years can reduce the final balance by roughly a quarter. Subtract expected costs from your return assumption for a realistic view.
Why is the real value much lower?
Because inflation compounds too. Dividing by (1 + inflation)^years converts future dollars into today's purchasing power. Over 30 years at 2.5% inflation, a future balance is worth less than half in present terms.
Monthly or annual compounding — does it matter?
Slightly. Monthly compounding produces a marginally higher balance than annual for the same stated rate, because interest starts earning interest sooner. The difference over decades is a few percent, not a multiple.
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More calculators
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Guides
- How to Value a Stock — the full valuation sequence, with a worked example
- Free Cash Flow Explained — the input every DCF depends on
- Margin of Safety Explained — why the discount is not optional
- Dividend Investing Guide — yield, payout ratio and dividend safety
- How to Read a Cash Flow Statement — three sections, eight combinations
- Intrinsic Value vs Market Price — why the two diverge, and how to behave
- How to Read a Balance Sheet — the asset side, and the four ways it misleads
- What Is a Good P/E Ratio? — the arithmetic behind a justified multiple
- Dividend Yield vs Total Return — why a high yield is not a high return
- How to Compare Two Stocks — a five-axis framework, worked side by side
- WACC Explained — the discount rate, built from five sourced inputs
- The DCF Method Explained — the forecast half of a DCF, and checking the terminal value
- The Graham Number Explained — Graham's ceiling tested on two companies, and what it cannot see