Understanding your calculation
Method, example and limitations
How the calculation works
Compounding earns interest on the original principal and previously earned interest. With no extra contributions, A = P(1 + r/n)^(nt), where r is a decimal annual rate, n is compounding periods per year and t is years. Contribution timing changes projections.
Example to check
$1,000 growing at 5% compounded annually becomes $1,050 after one year and $1,102.50 after two years, with no contributions or withdrawals. The second year earns $52.50 because interest also grows.
Before using the result
Match the contribution frequency and compounding setting. A hypothetical return is not guaranteed; taxes, fees, inflation and changing returns can materially reduce spending power.
CFPB: How compound interest works · Calculation methodology · Report a result that needs review