How Compound Interest Works: A $100 Example With Realistic Assumptions
Compound interest means earning interest on both your original money and interest already added. It can help savings grow over time, but it is not a shortcut or a guaranteed way to multiply an investment.
A small example
Suppose $100 earns a constant 5% annual interest rate, compounded once a year, with no deposits, withdrawals, fees, or taxes. These assumptions are for illustration only.
| End of year | Illustrative balance |
|---|---|
| 1 | $105.00 |
| 2 | $110.25 |
| 3 | $115.76 |
| 10 | $162.89 |
| 20 | $265.33 |
The second year earns $5.25 because interest is calculated on $105 rather than just the original $100.
How long would $100 take to become $1,000?
Under those same hypothetical assumptions, the balance first exceeds $1,000 after 48 full years. That is why a headline about turning $100 into $1,000 needs to state the rate, time, and whether more money is being added.
For annual compounding with no additional deposits, the formula is: future balance = starting balance × (1 + annual rate)years. Use the annual rate as a decimal, such as 0.05 for 5%. Different compounding frequencies require a different calculation.
Separate contributions from earnings
If you start with $100 and add $10 a month for a year, you have contributed another $120. Even at zero interest, you would then have $220. Growth from deposits is real progress, but it is different from interest earned.
When using a calculator, track three figures: starting money, additional deposits, and estimated earnings. This makes the result easier to understand and prevents a deposit-heavy example from looking like an extraordinary investment return.
A steady rate is an assumption
Some savings rates change. Investment returns can fluctuate and can be negative; stocks do not pay a guaranteed annual interest rate. Fees and taxes can reduce what you keep, while inflation affects what the money can buy.
A retirement account is an account type, not a guaranteed return. The investments held inside it determine much of its risk and growth potential. Do not assume that every account includes an employer contribution.
Use scenarios instead of a promise
The Investor.gov compound-interest calculator lets you change the starting amount, contributions, years, estimated rate, and compounding frequency. Compare several rates instead of treating one projection as an outcome you can count on.
Your next step: Choose an amount your budget can support, then model how different contribution levels affect the result. Keep near-term bills separate from money intended for a longer-term goal.
This article is general education. The 5% example is not a quoted account rate, investment recommendation, or forecast.
