Compound interest means future growth is calculated on the original principal and on growth already added. That makes time a powerful input, but a projection is not a promise: real returns, fees, taxes and inflation can change the outcome.
Simple interest versus compound interest
Simple interest is calculated only on the original principal. Compound interest periodically adds growth to the balance, so later periods can earn growth on a larger amount.
With €1,000 at 5% a year, simple interest adds €50 each year. Annual compounding produces €1,050 after year one and calculates year two's 5% on that new balance.
The core compound interest formula
For a lump sum, the common formula is A = P(1 + r/n)^(nt), where P is the starting principal, r is the annual rate as a decimal, n is the number of compounding periods per year and t is the number of years.
A €1,000 deposit growing at 5% annually for 10 years becomes about €1,628.89 before fees, tax and inflation. The €628.89 difference is projected growth.
Why regular contributions matter
Adding money regularly can have a larger effect than small changes in the assumed return. Each contribution gets its own amount of time to compound, so contributions made earlier usually have longer to grow.
Calculator results differ depending on whether contributions are treated as arriving at the beginning or end of each period. Kitalva uses end-of-period monthly contributions and states that assumption in the result.
The inputs that change the outcome
Time, return, contributions and compounding frequency all affect the projection. A higher assumed rate can greatly increase a long-term result, which is precisely why using an optimistic rate without testing alternatives can mislead.
- Compare conservative, middle and optimistic rate scenarios.
- Include platform or fund fees where they apply.
- Remember that inflation reduces future purchasing power.
- Treat market returns as variable, not a smooth annual rate.
Use a projection as a planning range
A compound interest calculator is most useful for comparing choices: starting earlier, changing a monthly contribution or extending the time horizon. It cannot predict a guaranteed investment return.