Common questions answered directly.
Compound interest is interest earned on both your principal and previously accumulated interest. Unlike simple interest (which only earns on the original principal), compound interest grows exponentially because each period's interest becomes part of the base for the next period's calculation.
The S&P 500's historical nominal average return is about 10% per year. After adjusting for inflation (about 3%), the real return is roughly 7%. For long-term planning, 7% is a conservative and widely-used estimate. Note that actual market returns are volatile year-to-year — the average is smooth only over long time horizons.
Less than most people expect. On $10,000 at 7% over 30 years: annual compounding gives $76,123, monthly gives $81,165 and daily gives $81,645 — daily beats monthly by only about $480. The rate and the time horizon matter far more than the compounding frequency. The rate and time horizon matter far more than frequency.
Time. The earlier you start, the more powerful compounding becomes. An investor who starts at 25 and stops at 35 (10 years of contributions) often ends up with more at 65 than someone who starts at 35 and contributes for 30 straight years, due to the extra decade of compounding.
No — the calculator shows nominal, pre-tax growth. For taxable accounts, gains are subject to capital gains tax when sold. For inflation-adjusted real returns, reduce your rate by about 2-3%. For retirement accounts (401k, Roth IRA), gains grow tax-deferred or tax-free.
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