How Savings Compound

A practical method

Compound growth means each period's return is added to the balance so later returns can apply to both the original principal and earlier growth. Contributions, fees, taxes, and variable rates can have a larger effect than small differences in compounding frequency, so projections should keep those assumptions visible.

1. Choose the starting balance: Use the amount available at the beginning of the projection.
2. Match rate and frequency: Convert the annual rate to the same period used for compounding.
3. Place contributions correctly: Deposits at the beginning of a period grow for one more period than end-of-period deposits.
4. Separate deposits from growth: Report final balance, total contributions, and estimated investment growth as distinct values.

Worked example

At a constant 5% annual rate compounded monthly, $1,000 with no further deposits becomes about $1,051.16 after one year. The figure is slightly above $1,050 because interest is added monthly. It excludes taxes, fees, and rate changes.

Checks, edge cases, and common mistakes

• Do not use a high assumed return without showing a lower scenario.
• Nominal rate and effective annual yield are not interchangeable.
• Inflation changes future purchasing power even when the account balance grows.
• A projection illustrates assumptions; it does not guarantee future results.