How to Use This Tool
Enter what you start with, what you add each month, a return and a period. The total is the least interesting output on the page; the decade table is the point.
Why nothing seems to happen for ten years
Compounding earns returns on returns, and in the early years there are barely any returns to earn returns on. The balance is almost entirely your own contributions, which is why the first decade looks and behaves like a savings account.
By the third decade the growth is compounding on two decades of previous growth, and that is where the shape changes.
$500 a month, 7%, 30 years, monthly compounding contributed $180,000 final balance $609,985 growth $429,985 70% of the total decade 1 ends at $86,542 adds $86,542 decade 2 ends at $260,463 adds $173,921 decade 3 ends at $609,985 adds $349,522 the last decade alone beats the first twenty years
The cost of waiting is not the missed contributions
Starting five years later means putting in $30,000 less and ending $204,950 lower. That is $6.83 of final balance for every $1 not contributed.
The reason is that the missing years are the early ones. A dollar contributed in year one has thirty years to compound; a dollar contributed in year twenty-six has four. Delay does not remove five average years, it removes the five most valuable ones.
Compounding frequency matters far less than people think
Moving from annual to daily compounding at 7 per cent changes the effective annual rate from 7.00 to about 7.25 per cent. It is real, and it is a rounding error next to contributing for five more years. Frequency is worth checking on a savings account and worth ignoring in a decision about when to start.
A fixed rate is a model, not a forecast
Real returns are not 7 per cent every year; they are a sequence with the same average and a lot of variance. For someone contributing steadily the order does not matter much to the end balance. For someone drawing money out it matters enormously, because a bad first few years permanently reduces the capital that the later good years work on. That effect is outside this calculation.
Inflation is not modelled here either
A balance of $609,985 in thirty years does not buy what $609,985 buys today. If you want the answer in today's money, subtract expected inflation from the return before entering it: 7 per cent nominal minus 3 per cent inflation is a 4 per cent real return, which on the same contributions gives a much smaller and much more honest figure.
