How Compound Growth Works
Compound growth means your earnings generate their own earnings. In year one, a $10,000 investment at 7% earns $700. In year two, you earn 7% on $10,700—not just the original $10,000. That extra $49 doesn't sound like much, but after 30 years the compounding effect accounts for more than 70% of your total portfolio value.
Monthly contributions amplify the effect. Every $500 deposit immediately starts compounding, and earlier deposits have more time to grow. The first $500 you contribute has 30 years to compound. The last $500 has one month. That's why starting early matters more than contributing more later.
The Rule of 72
Divide 72 by your annual return to estimate how many years it takes to double your money. At 7%, your money doubles every 10.3 years. At 10%, every 7.2 years. At 4%, every 18 years. This mental shortcut works because logarithmic math approximates cleanly at typical investment returns.
Apply it in reverse, too: if you want to double your money in 6 years, you need a 12% annual return (72 / 6 = 12). That frames expectations—doubling in 6 years requires aggressive growth stocks or leveraged strategies, while doubling in 10 years is a standard equity index fund.
Nominal vs. Real Returns
Nominal return is the headline number—what your brokerage statement shows. Real return subtracts inflation, showing what your money actually buys. If your portfolio grows 7% and inflation runs 3%, your real return is roughly 4%. Over 30 years, that gap is enormous.
| Scenario | Nominal Return | Inflation | Real Return | $10K after 30 yr |
|---|---|---|---|---|
| Conservative | 5% | 3% | ~2% | $18,114 |
| Balanced | 7% | 3% | ~4% | $32,434 |
| Aggressive | 10% | 3% | ~7% | $76,123 |
| High Inflation | 7% | 5% | ~2% | $18,114 |
*Real return values show purchasing power in today's dollars. Lump sum only, no additional contributions.
Historical Market Returns by Decade
The S&P 500 has averaged roughly 10% nominal annual returns since 1926, but individual decades vary wildly. The 1990s delivered nearly 18% per year. The 2000s—the “lost decade”—returned -1% per year after the dot-com crash and the 2008 financial crisis. No single decade predicts the next.
| Decade | Avg. Annual Return (S&P 500) | Avg. Inflation | Real Return |
|---|---|---|---|
| 1960s | 7.8% | 2.5% | 5.3% |
| 1970s | 5.9% | 7.1% | −1.2% |
| 1980s | 17.6% | 5.1% | 12.5% |
| 1990s | 18.2% | 2.9% | 15.3% |
| 2000s | −0.9% | 2.5% | −3.4% |
| 2010s | 13.6% | 1.8% | 11.8% |
| 2020–2024 | 14.5% | 4.7% | 9.8% |
Source: NYU Stern (Damodaran) and BLS CPI data. Returns include dividends, before taxes and fees.
To see how fees eat into these returns, use the investment fee calculator. To project whether you'll have enough saved by retirement, run the retirement calculator. And if you want to model compounding with different frequencies, try the compound interest calculator.