How the future value formula works
Future value tells you what an investment will be worth later if it grows at a steady rate. It has two parts: your starting principal compounding on its own, plus the stream of contributions you keep adding, each of which compounds for however long it stays invested.
FV = PV(1 + r)^n + PMT x [((1 + r)^n - 1) / r]This calculator compounds monthly, so r is your annual return divided by 12 and n is the number of months. The chart separates the money you put in from the growth on top, which is where compounding really shows up.
A worked example
Start with $10,000, add $500 a month, and assume a 7% annual return for 20 years. You contribute $130,000 of your own money, but the balance grows to roughly $310,000, meaning compound growth added about $180,000 on top of what you put in. Stretch the timeline to 30 years and the growth portion dwarfs the contributions, which is the core argument for investing early.
Things to keep in mind
- Returns are not smooth in real life; a steady rate is a planning assumption, not a promise.
- These are nominal dollars. To think in today's money, use a return net of inflation (e.g. 7% - 3% = 4%).
- Taxes and fees reduce real-world returns; tax-advantaged accounts help you keep more of the growth.