How Investment Growth Works
Building wealth through investing relies on two powerful forces: Time and Compound Interest. This calculator models how your money grows when you not only earn interest on your initial deposit but also continue adding to the pot regularly.
[Image of compound interest graph]Future Value = Future Value of Initial Lump Sum + Future Value of Annuity (Contributions)
Unlike a simple interest calculation, this tool assumes that every dollar you contribute starts earning its own interest the moment it hits the account. Over 10, 20, or 30 years, the "Total Interest Earned" often exceeds the actual amount of money you put in.
Definition of Terms
Starting Amount
The initial lump sum you have ready to invest today.
Additional Contribution
The amount you plan to add regularly (e.g., $200 from every paycheck). Consistency is key here.
Rate of Return
The annual percentage growth you expect. The S&P 500 historically returns about 10% on average (before inflation), while a high-yield savings account might offer 4-5%.
Step-by-Step Instructions
- Enter Starting Amount: If you are starting from zero, just enter 0.
- Set Contributions: Decide how much you can afford to save monthly or annually.
- Estimate Return: Be conservative. 7% or 8% is a common figure used for long-term stock market growth projections.
- Set Time Horizon: Enter how many years you will let the money grow.
- Review the Breakdown: Check the "Total Contributions" vs. "Total Interest Earned" to see exactly how hard your money is working for you.