Model compounding returns with optional contributions.

Compound interest is the process of earning interest on both your original capital and the interest that has already been added. Over long periods, this creates exponential growth and becomes the foundation of long-term investing.

How compounding works

Each compounding period, your balance earns interest. That interest is added to the balance, and the next period earns interest on the larger amount. The result is a curve that accelerates over time.

The key drivers are:

• Starting capital
• Rate of return
• Compounding frequency
• Time
• Regular contributions

Even small differences in these inputs can lead to dramatically different outcomes over many years.

Why frequency matters

If interest is compounded monthly instead of yearly, your balance is updated more often. That means you earn interest on your interest more frequently. In the long run, higher compounding frequency produces a slightly larger final balance, especially when paired with contributions.

The role of regular contributions

Regular contributions increase the base on which interest is earned. This is why consistent deposits often matter as much as the rate itself. A moderate return with steady contributions can outperform a high return with no contributions.

Example scenario

Suppose you start with $5,000, earn 8% per year, and add $100 each month:

• Without contributions, growth is steady but limited.
• With contributions, the balance grows faster because new deposits also earn interest.

The calculator shows total contributions and total interest so you can see how much growth comes from each source.

Start-of-period vs end-of-period contributions

If contributions are added at the start of each period, they earn interest immediately, producing a higher final balance. If they are added at the end, the outcome is slightly lower. Comparing both scenarios gives you a realistic range.

When to use compound interest

This calculator is useful for:

• Long-term investing and retirement planning.
• Estimating the impact of DCA contributions.
• Comparing different savings or investment strategies.
• Setting realistic wealth targets.

Common mistakes

• Using unrealistic return rates that are unlikely to persist.
• Ignoring the impact of fees and taxes.
• Assuming a smooth return path with no drawdowns.

Key takeaways

• Compounding rewards time, consistency, and patience.
• Regular contributions often matter more than rate changes.
• Frequency changes the result, but time has the biggest impact.

Use the TradeOrbit calculator to model realistic scenarios, compare contribution plans, and build a long-term roadmap.