Compound interest explained: contributions, fees and inflation

Time does heavy lifting

The longer returns remain invested, the more future growth can come from earlier growth rather than from new contributions.

Fees compound too

A small annual fee can create a large difference over decades because the money paid in fees also loses all of its future potential growth.

Inflation changes purchasing power

A future portfolio balance is a nominal number. Dividing by cumulative inflation gives a rough estimate of what that balance may be worth in today's purchasing power.

Increasing contributions can be powerful

If income rises over time, increasing contributions by even a small percentage each year can materially change the long-term result.