Compounding occurs when investment results affect the amount on which later returns are earned. Positive returns can build on previous gains; losses also compound. Contributions and withdrawals change the base along the way.
Work a small example
At a hypothetical 5% annual return, $1,000 becomes $1,050 after one year and $1,102.50 after two. The second year's $52.50 gain includes a return on the first year's gain. No actual investment is implied by the assumed rate.
Use consistent conventions
An annual effective rate differs from a nominal annual rate divided into monthly periods. Contribution timing matters too: money added at the beginning of a month earns an extra period compared with money added at the end.
Test several paths
Our calculator uses a constant nominal annual rate and month-end contributions to make the arithmetic transparent. Markets do not deliver smooth returns. Fees, taxes, inflation, sequence effects, and changing contributions can alter real outcomes.
Use a projection to explore savings amounts and horizons, then test lower-return and loss scenarios. A precise dollar output describes the assumptions precisely; it does not make those assumptions probable.
Sources & further reading
Check the linked source for current rules and disclosures. Numerical examples on Stockbok are hypothetical unless explicitly attributed.
Take the next chapter with you.
Compare books and study tools for this topic, with clear selection criteria.
Browse the reading list →Contains Amazon affiliate links. As an Amazon Associate I earn from qualifying purchases.
General financial education, not personalized investment or tax advice. Investing involves risk, including loss of principal.