Compound Interest Examples
The tables below show the effect of compound interest and inflation on different patterns of contributions.
Contributions are assumed to be made annually in advance.
In these examples an interest rate of 10% pa and inflation rate of 5% pa have been used.
Example 1 shows a contribution of 2,000 per annum for seven years and then no further contributions.
Example 2 shows no contributions in the first seven years and then an annual contribution of 2,000 for the rest of the term.
You will see that in nominal values, i.e. ignoring inflation, the value in example 1 is 944,641 at age 65 from contributions of 14,000.
In example 2 the nominal value is higher at 973,704 but contributions were much higher at 80,000.
The net profit in example 1 is 930,641 compared with a net profit of 893,704 in example 2.
This illustrates the power of compound interest and the value of early contributions.
However, if inflation is brought into the equation, a different picture emerges. The later contributions become more valuable as
the earlier contributions are eroded by inflation. Thus looking at returns net of inflation, the profit in example 1 reduces to
94,882 in real terms compared with a profit of 158,871 from example 2.
If you would like a spreadsheet version of these examples e-mailed to you please e-mail us
Example 1 : Early Contributions, 10% Interest, 5% Inflation
|
Age
|
Year
|
Annual Contribution
|
Nominal Value at end of Year
|
Real Value at end of Year
|
|
19
|
1
|
2,000.00
|
2,200.00
|
2,095.24
|
|
20
|
2
|
2,000.00
|
4,620.00
|
4,290.25
|
|
21
|
3
|
2,000.00
|
7,282.00
|
6,589.79
|
|
22
|
4
|
2,000.00
|
10,210.20
|
8,998.82
|
|
23
|
5
|
2,000.00
|
13,431.22
|
11,522.58
|
|
24
|
6
|
2,000.00
|
16,974.34
|
14,166.51
|
|
25
|
7
|
2,000.00
|
20,871.78
|
16,936.34
|
|
26
|
8
|
|
22,958.95
|
17,742.83
|
|
27
|
9
|
|
25,254.85
|
18,587.73
|
|
28
|
10
|
|
27,780.33
|
19,472.86
|
|
29
|
11
|
|
30,558.37
|
20,400.14
|
|
30
|
12
|
|
33,614.20
|
21,371.58
|
|
31
|
13
|
|
36,975.62
|
22,389.27
|
|
32
|
14
|
|
40,673.19
|
23,455.43
|
|
33
|
15
|
|
44,740.51
|
24,572.35
|
|
34
|
16
|
|
49,214.56
|
25,742.46
|
|
35
|
17
|
|
54,136.01
|
26,968.29
|
|
36
|
18
|
|
59,549.61
|
28,252.50
|
|
37
|
19
|
|
65,504.57
|
29,597.86
|
|
38
|
20
|
|
72,055.03
|
31,007.28
|
|
39
|
21
|
|
79,260.54
|
32,483.81
|
|
40
|
22
|
|
87,186.59
|
34,030.66
|
|
41
|
23
|
|
95,905.25
|
35,651.17
|
|
42
|
24
|
|
105,495.77
|
37,348.84
|
|
43
|
25
|
|
116,045.35
|
39,127.36
|
|
44
|
26
|
|
127,649.88
|
40,990.57
|
|
45
|
27
|
|
140,414.87
|
42,942.50
|
|
46
|
28
|
|
154,456.36
|
44,987.38
|
|
47
|
29
|
|
169,902.00
|
47,129.64
|
|
48
|
30
|
|
186,892.20
|
49,373.91
|
|
49
|
31
|
|
205,581.42
|
51,725.05
|
|
50
|
32
|
|
226,139.56
|
54,188.14
|
|
51
|
33
|
|
248,753.51
|
56,768.53
|
|
52
|
34
|
|
273,628.86
|
59,471.79
|
|
53
|
35
|
|
300,991.75
|
62,303.78
|
|
54
|
36
|
|
331,090.93
|
65,270.63
|
|
55
|
37
|
|
364,200.02
|
68,378.76
|
|
56
|
38
|
|
400,620.02
|
71,634.89
|
|
57
|
39
|
|
440,682.02
|
75,046.07
|
|
58
|
40
|
|
484,750.23
|
78,619.69
|
|
59
|
41
|
|
533,225.25
|
82,363.49
|
|
60
|
42
|
|
586,547.77
|
86,285.56
|
|
61
|
43
|
|
645,202.55
|
90,394.40
|
|
62
|
44
|
|
709,722.80
|
94,698.89
|
|
63
|
45
|
|
780,695.09
|
99,208.36
|
|
64
|
46
|
|
858,764.59
|
103,932.57
|
|
65
|
47
|
|
944,641.05
|
108,881.74
|
|
Grand Totals
|
14,000.00
|
944,641.05
|
108,881.74
|
|
Less Contributions Made
|
14,000.00
|
14,000.00
|
|
Net total profit
|
930,641.05
|
94,881.74
|
|
Example 2 : Later Contributions, 10% Interest, 5% Inflation
|
Age
|
Year
|
Annual Contribution
|
Nominal Value at end of Year
|
Real Value at end of Year
|
|
19
|
1
|
|
0.00
|
0.00
|
|
20
|
2
|
|
0.00
|
0.00
|
|
21
|
3
|
|
0.00
|
0.00
|
|
22
|
4
|
|
0.00
|
0.00
|
|
23
|
5
|
|
0.00
|
0.00
|
|
24
|
6
|
|
0.00
|
0.00
|
|
25
|
7
|
|
0.00
|
0.00
|
|
26
|
8
|
2,000.00
|
2,200.00
|
2,095.24
|
|
27
|
9
|
2,000.00
|
4,620.00
|
4,290.25
|
|
28
|
10
|
2,000.00
|
7,282.00
|
6,589.79
|
|
29
|
11
|
2,000.00
|
10,210.20
|
8,998.82
|
|
30
|
12
|
2,000.00
|
13,431.22
|
11,522.58
|
|
31
|
13
|
2,000.00
|
16,974.34
|
14,166.51
|
|
32
|
14
|
2,000.00
|
20,871.78
|
16,936.34
|
|
33
|
15
|
2,000.00
|
25,158.95
|
19,838.07
|
|
34
|
16
|
2,000.00
|
29,874.85
|
22,877.98
|
|
35
|
17
|
2,000.00
|
35,062.33
|
26,062.65
|
|
36
|
18
|
2,000.00
|
40,768.57
|
29,398.96
|
|
37
|
19
|
2,000.00
|
47,045.42
|
32,894.15
|
|
38
|
20
|
2,000.00
|
53,949.97
|
36,555.78
|
|
39
|
21
|
2,000.00
|
61,544.96
|
40,391.77
|
|
40
|
22
|
2,000.00
|
69,899.46
|
44,410.42
|
|
41
|
23
|
2,000.00
|
79,089.41
|
48,620.44
|
|
42
|
24
|
2,000.00
|
89,198.35
|
53,030.94
|
|
43
|
25
|
2,000.00
|
100,318.18
|
57,651.46
|
|
44
|
26
|
2,000.00
|
112,550.00
|
62,492.01
|
|
45
|
27
|
2,000.00
|
126,005.00
|
67,563.05
|
|
46
|
28
|
2,000.00
|
140,805.50
|
72,875.58
|
|
47
|
29
|
2,000.00
|
157,086.05
|
78,441.09
|
|
48
|
30
|
2,000.00
|
174,994.65
|
84,271.61
|
|
49
|
31
|
2,000.00
|
194,694.12
|
90,379.79
|
|
50
|
32
|
2,000.00
|
216,363.53
|
96,778.82
|
|
51
|
33
|
2,000.00
|
240,199.88
|
103,482.58
|
|
52
|
34
|
2,000.00
|
266,419.87
|
110,505.56
|
|
53
|
35
|
2,000.00
|
295,261.86
|
117,862.96
|
|
54
|
36
|
2,000.00
|
326,988.05
|
125,570.72
|
|
55
|
37
|
2,000.00
|
361,886.85
|
133,645.52
|
|
56
|
38
|
2,000.00
|
400,275.53
|
142,104.83
|
|
57
|
39
|
2,000.00
|
442,503.09
|
150,966.97
|
|
58
|
40
|
2,000.00
|
488,953.40
|
160,251.11
|
|
59
|
41
|
2,000.00
|
540,048.74
|
169,977.35
|
|
60
|
42
|
2,000.00
|
596,253.61
|
180,166.75
|
|
61
|
43
|
2,000.00
|
658,078.97
|
190,841.35
|
|
62
|
44
|
2,000.00
|
726,086.87
|
202,024.28
|
|
63
|
45
|
2,000.00
|
800,895.56
|
213,739.72
|
|
64
|
46
|
2,000.00
|
883,185.11
|
226,013.04
|
|
65
|
47
|
2,000.00
|
973,703.62
|
238,870.80
|
|
Grand Totals
|
80,000.00
|
973,703.62
|
238,870.80
|
|
Less Contributions Made
|
80,000.00
|
80,000.00
|
|
Net total profit
|
893,703.62
|
158,870.80
|
|
|
