Frequently Asked Questions
What's the difference between simple and compound interest?
Simple interest is calculated only on the principal amount. Compound interest is calculated on principal plus accumulated interest. Over time, compound interest dramatically outperforms—on a 7% investment over 30 years, compound interest generates about 5x more than simple interest.
How often should interest compound?
More frequent compounding is slightly better, but the difference is small. Daily vs. monthly compounding might add 0.1-0.2% effective yield. Most investments compound monthly or daily. Don't choose an investment solely based on compounding frequency—focus on the actual rate and fees.
What rate of return should I expect?
Historical stock market averages 7-10% annual return (inflation-adjusted about 6-7%). Bonds typically 3-5%. Savings accounts 0.5-5%. Use conservative estimates (6-7%) for planning. Past performance doesn't guarantee future results—markets fluctuate year to year.
How much should I save monthly?
Standard advice: 15-20% of income for retirement. Start with what you can—even $100/month builds habit. Increase 1% every raise. Max employer 401k match first (free money), then IRA, then more 401k. Consistency beats perfection.
Is 7% return realistic?
For diversified stock investments over long periods (10+ years), yes. S&P 500 historical average is about 10% nominal, 6-7% inflation-adjusted. Short-term volatility is high—some years -20%, others +30%. Long-term investors are rewarded for riding out volatility.
What about inflation?
This calculator shows nominal returns. Inflation (historically 2-3%) erodes purchasing power. If you earn 7% and inflation is 3%, real return is 4%. For retirement planning, consider inflation-adjusted numbers or increase contributions over time to maintain purchasing power.
Should I pay off debt or invest?
Compare interest rates. Pay off high-interest debt (credit cards 15%+) first—guaranteed return. Moderate debt (student loans 4-6%)? Invest if you can earn more than interest cost, but consider the guaranteed "return" of debt freedom. Low-interest debt (mortgage 3-4%)? Usually invest extra funds.
What's the Rule of 72?
Divide 72 by your interest rate to estimate years to double your money. At 8%, money doubles in 9 years (72Ă·8=9). At 6%, 12 years. Quick mental math for compound growth. Accurate for rates 6-10%; less precise for very high or low rates.
Can I become a millionaire?
Absolutely. Save $500/month at 8% for 30 years = $745k. At 7% = $609k. Bump to $750/month at 8% = $1.1M. Starting early is key. $300/month from age 25 to 65 at 7% = $785k. Consistency and time matter more than huge contributions.
What if I start late?
Start anyway. Better at 40 than never. You'll need larger contributions: $1,000/month from 40-65 at 7% = $811k. Consider: maxing all tax-advantaged accounts, working longer, reducing expenses, or part-time work in early retirement years.
Should I max out 401k or Roth IRA?
Ideal: do both. Order typically: 1) 401k to employer match, 2) max Roth IRA ($7,000/year), 3) max 401k ($23,000/year). Roth grows tax-free, 401k reduces current taxes. Roth better if you expect higher tax rate in retirement; traditional better if current rate is higher.
What about market crashes?
They're normal and temporary. Since 1929, average recovery time is 2-3 years. Long-term investors who stay invested through crashes end up ahead. Don't panic sell—that locks in losses. Keep investing consistently—crashes are buying opportunities for long-term investors.