What does compounding mean?
Compounding adds earlier interest to the base for later calculations. Investor.gov distinguishes interest on principal from interest on accumulated interest. This mechanism is not a return promise: rates, time, reinvestment and costs are inputs. This article is general financial education, not investment or borrowing advice.
The example uses TRY 10,000, annual compounding and a constant fictional 10% annual rate. It describes no current product or forecast. There are no contributions or withdrawals, and the first calculation excludes tax and inflation. This isolates the mathematical comparison.
Simple and compound interest are different
Under simple interest, the initial TRY 10,000 produces TRY 1,000 each year, reaching TRY 15,000 after five years. Compounding yields TRY 11,000 after year one, TRY 12,100 after year two and TRY 16,105.10 after year five. The TRY 1,105.10 difference comes from a growing calculation base.
For annual fixed rate r over n years, the formula is P × (1 + r)^n. Enter 10% as 0.10, not 10. Monthly nominal rates, effective annual rates and compounding frequency are different concepts. Check which period a quoted rate represents before using it in this annual model.
P = 10,000 TRY; r = 0.10; n = 5
Simple interest: P x (1 + r x n) = 15,000.00 TRY
Compound interest: P x (1 + r)^n = 16,105.10 TRY
Difference / Fark = 1,105.10 TRYWhy is a 1% fee not simply TRY 100?
The SEC fee bulletin explains that charges reduce both the current balance and the base that can earn later returns. Our separate model applies 10% gross growth, then a 1% charge on that year-end balance. The annual multiplier is 1.10 × 0.99 = 1.089. That sequence is an assumption, not every product's fee structure.
After five years, this model produces TRY 15,315.79, about TRY 789.31 below the fee-free case. At ten years the balances are TRY 25,937.42 and TRY 23,457.34, a difference of about TRY 2,480.08. That includes foregone growth, not just accumulated charges. Rounding is applied only for display.
Annual factor after fee: 1.10 x 0.99 = 1.089
5 years: 10,000 x 1.089^5 = 15,315.79 TRY
10 years, no fee: 10,000 x 1.10^10 = 25,937.42 TRY
10 years, with fee: 10,000 x 1.089^10 = 23,457.34 TRYRecord the calculator's assumptions too
The Investor.gov calculator separates initial amount, contributions, time, estimated rate and compounding frequency. To compare our first example, use zero contributions, five years and annual compounding. Choosing another frequency changes the model, so the same result should not be assumed.
A note such as 'constant rate, year-end fee, no contributions' makes a result auditable. Daily charges, start-of-month contributions or withdrawals require another calculation. When outputs differ, compare timing and the calculation base before changing the rate.
A growing balance does not guarantee purchasing power
The model grows smoothly because every year uses the same positive rate. Real investments can involve losses, changing returns, fees, taxes and cash flows. Compounding does not eliminate those risks. Neither past performance nor an assumed rate is a certain future outcome.
Distinguish gross balance, balance after charges and inflation-adjusted value. This article covers the first two; the real-return article covers the third. Whether the initial money is already needed for another budget commitment is a separate question the interest formula cannot answer.
Source: Investor.gov: compound-interest definition
Source: Investor.gov: compound-interest calculator
Source: SEC: how fees affect a portfolio