📈 Compound Interest

How it works

Compound interest is what happens when the interest you earn starts earning interest of its own. In the first year your money grows a little; in year twenty it grows a lot, because each year's gains are added to the pile and then grow themselves. This snowball effect is the single biggest reason that starting early matters more than contributing a lot later.

This calculator shows the future value of a lump sum, a stream of regular contributions, or both, at an assumed annual rate. Canadians typically use it to project TFSA or RRSP growth, but it works for any compounding investment — savings accounts, GICs, index funds — anything where returns are reinvested rather than spent.

The formula

Future value of a lump sum: A = P(1 + r/n)^(nt), where P is the starting amount, r is the annual interest rate as a decimal, n is how many times per year interest compounds, and t is the number of years. Regular monthly contributions use a related formula that adds up each deposit's growth separately. A handy shortcut is the Rule of 72: divide 72 by your annual rate to estimate how many years it takes to double your money.

Worked example

You invest $10,000 at 6% per year, compounded monthly, and add $200 at the end of every month for 10 years. The lump sum grows to 10000 × (1 + 0.06/12)^120 ≈ $18,194.07. The monthly contributions grow to 200 × (((1 + 0.06/12)^120 − 1) / (0.06/12)) ≈ $32,775.87. Combined: about $50,970 from $34,000 of your own contributions.

Frequently asked questions

Does compounding frequency matter much?
Some, but less than people think. Monthly compounding beats annual compounding at the same nominal rate, just not by a lot — on $10,000 at 6% over 10 years the difference is under $60. Your rate and your time horizon matter far more.

What return should I assume?
Be conservative. Canadian investors often model 6–7% for a long-term equity portfolio (roughly the historical real-ish return of broad markets) and 3–4% for a conservative GIC/HISA mix. Always sanity-check with a lower number too.

Is inflation included?
No — this calculator shows nominal dollars. If inflation averages 2%, money that grows 6% nominally grows about 4% in real purchasing power. Use the inflation calculator alongside this one for the full picture.

Why the last years do the heavy lifting

Compound growth is back loaded. In the early years your balance grows mostly because you keep adding money; the interest itself is small because the balance is small. Later, the balance is large enough that a single year of growth can exceed everything you deposited in the first several years. At a 6 percent return, money doubles roughly every 12 years, so the doubling that matters most is the last one before you need the money. This shape explains the two levers that dominate your result: the number of years the money stays invested, and the return after fees. Deposit size matters, but time and rate quietly outrank it. One caution: a calculator draws a smooth line, while real markets deliver the same average through sharp drops and flat stretches. Treat the projection as a planning path, not a promise.

A worked example

Start with $10,000 and add $200 a month for 20 years at a 6 percent annual return, compounded monthly. The original $10,000 grows to $33,102 on its own. The monthly deposits grow to $92,408. Together you hold $125,510. Look at where it came from: you deposited $58,000 in total, and growth supplied the other $67,510. The interest outearned you.

Rate differences look small and are not. Park $10,000 for 30 years and a 5 percent return produces $43,219, while 7 percent produces $76,123. Two percentage points, compounded over three decades, nearly double the outcome. Fees run the same math against you: earning 5 percent instead of 6 percent over 30 years leaves you with $43,219 instead of $57,435, about a quarter of your ending wealth quietly handed to costs.

Common mistakes

• Waiting for a better moment to start. A late start removes the final doubling, which is the biggest one. A smaller amount invested earlier usually beats a larger amount invested late.
• Judging by nominal return only. Inflation and taxes take their cut. A 6 percent return with 3 percent inflation is roughly 3 percent of real growth, and interest earned outside registered accounts is taxed as it accrues.
• Stopping contributions in a downturn. Pausing deposits when prices fall means missing the cheapest purchases, and the recovery years arrive on a smaller base.
• Assuming the rate is guaranteed. The calculator applies one steady rate. Savings accounts change their rates and markets swing, so test your plan at a lower return and see whether it still works.

Frequently asked questions

Does compounding frequency make a big difference?

Less than most people expect. Monthly instead of annual compounding at 6 percent over 20 years adds roughly $1,000 to a $10,000 investment, while one extra point of return adds over $6,000. Spend your attention on the rate, the fees attached to it, and the number of years the money stays invested.

What rate of return should I assume in this calculator?

Use a cautious figure, not your best recent year. Many planners test balanced portfolios at 5 to 6 percent before inflation, then rerun the numbers at 4 percent to check the plan still holds. If your goal only works at 9 or 10 percent, the plan, not the market, needs adjusting.

Does compound interest work the same way on debt?

Yes, and against you. Interest is charged on interest you have not paid, which is why a $5,000 credit card balance near 20 percent can cost more in interest than the original purchase when only the minimum is paid. The same curve that builds savings quietly builds balances, just in the other direction.

When does growth overtake the money I put in?

It depends on rate and time, but the crossover is real. In the worked example on this page, $58,000 of deposits turned into $125,510, so growth supplied the majority of the final value. That only happens if the money stays invested long enough for the later, larger doublings to arrive.