How compounding works
Compound interest is calculated on the principal plus the interest already earned. Each period starts from a larger balance than the last, so growth accelerates rather than staying flat.
The compounding frequency is how often that interest is added to the balance. More frequent compounding gives a slightly higher effective return for the same nominal rate, which is why the effective annual rate is the figure worth comparing between products.
Regular contributions
Money paid in later compounds for less time, so a contribution in year nine of a ten-year term contributes almost nothing but itself. This is why the breakdown separates what you put in from what the interest earned - the two are rarely in the proportion people expect.
Frequently asked questions
- What is the compound interest formula?
- A = P(1 + r/n)^(nt), where P is the principal, r the annual rate as a decimal, n the number of compounding periods a year and t the time in years. Regular contributions are handled separately with annuity maths, because each contribution compounds only for the time remaining after it is paid in.
- How much difference does compounding frequency make?
- Less than most people expect. 100,000 at 10% for 10 years reaches 259,374 compounded annually and 270,704 compounded monthly - about 4% more. Daily compounding adds barely anything on top of monthly. The rate and the term matter far more.
- Does contribution timing matter?
- Yes. A contribution at the start of each period earns interest for that period; one at the end does not. Over a long term the difference is worth a full period's growth on every contribution.
- How accurate is this?
- The arithmetic is exact and uses decimal rather than floating-point maths, so results are not skewed by rounding. Where a calculation depends on legislation, the page shows which rule year it used, when those rules were last checked and the official source they came from. Results are estimates for information, not advice.
- Are my figures sent anywhere?
- No. Every calculation runs inside your browser. Nothing you type - salary, income, dates or amounts - is sent to our servers, stored or logged. You can disconnect from the network after the page loads and the calculator keeps working.