Compound Interest Explained With Real Numbers

Compound interest means earning returns on your past returns, not just on the money you put in. Over short periods the effect is small. Over decades it usually becomes the largest part of the balance.

A worked example

Start with $10,000, add $300 a month, and assume a 7% average annual return for 25 years:

Result	Amount
Ending balance	$300,276
Your money (initial + contributions)	$100,000
Growth from compounding	$200,276
Ending balance in today's dollars (2.5% inflation)	$161,966

Two-thirds of the ending balance is growth. The inflation-adjusted figure is a reminder that future dollars buy less.

Run your own numbers in the compound interest calculator.

Time matters more than amount

Compare two savers who each put away $300 a month at 7%, starting from zero:

Saving period	Contributed	Ending balance
25 years	$90,000	$243,022
35 years	$126,000	$540,316

Ten extra years adds $36,000 of contributions, but more than doubles the ending balance. Most of the difference comes from growth in the final decade, when the balance is largest.

Keep expectations realistic

A steady 7% is a simplification. Real returns vary from year to year and can be negative, and fees reduce growth. Run the calculation at a lower rate as well, and treat the result as an illustration, not a promise.

Source: Investor.gov: Compound interest calculator.