In what order does a contribution-based investment compound?
The return rate is only part of a compound-growth calculation. The timing of each contribution, dividend reinvestment, and the conversion from an annual rate to monthly growth all affect the result.
Four assumptions Future Balance defines first
The initial balance is invested from the start. Each monthly contribution arrives at month-end, after that month’s growth is applied. Price return and dividend yield are added to form an effective annual return, and dividends are fully reinvested. Investment tax, trading fees, and inflation are not included.
Monthly compounding does not simply divide the annual rate by twelve
For a 9% effective annual return, the calculator uses the monthly growth factor that compounds to exactly 1.09 after twelve applications. It grows the previous balance first and then adds the month-end contribution.
q = (1 + R)^(1/12), B_m = B_(m-1) × q + CAnnual compounding applies after each complete twelve-month holding period
Under annual compounding, the initial balance and every monthly contribution receive the annual return once for each full twelve months they have been held. With only an initial balance and a whole number of years, monthly and annual compounding end at the same value. Contributions create a difference because each one has a different holding period.
Worked example: start with 10,000,000 and add 500,000 monthly for one year
Assume price return plus dividend yield equals a 9% annual return. Total contributed principal is 16,000,000. Under Future Balance’s month-end contribution rule, monthly compounding produces 17,143,649, while annual compounding produces 16,900,000.
The difference is not proof that one option is universally better. It comes from when growth is credited to contributions held for less than twelve months. A real account with different cash-flow timing will produce a different result.
What to check when reading the result
- Subtract contributed principal from the final value to isolate projected earnings.
- Treat new contributions as principal growth, not investment profit.
- Confirm that price return and dividend yield use compatible annual-rate definitions.
Common input mistakes
If the price-return assumption already includes reinvested dividends, entering the same return again as dividend yield double counts it. Avoid entering 9% every month when you mean 9% per year, or treating an assumed return as a guaranteed rate. For useful comparisons, hold time, contributions, and compounding frequency constant and vary only the return assumption.
What this projection leaves out
It excludes trading fees, tax, inflation, foreign exchange, monthly return variation, and the sequence of gains and losses. Two paths with the same annualized return can feel very different because actual volatility and cash-flow timing matter.