Compound interest and real purchasing power

Short answer #

Compounding occurs when earlier gains themselves earn returns. Time is therefore powerful. Inflation shows what the nominal future value means in today’s purchasing power.

Important variables #

• Starting capital and monthly contribution
• Expected return
• Period
• Inflation, fees and taxes

Worked example #

€10,000 initially and €300 monthly produce €82,000 of contributions over 20 years. At an assumed return the nominal result is higher; real purchasing power is lower due to inflation.

Break-even: What changes the result? #

One extra percentage point matters strongly over time but is not guaranteed. A higher contribution is directly controllable.

Common mistakes #

• Reading nominal value as today’s purchasing power
• Calculating return linearly
• Mixing contribution timing
• Forgetting fees and tax

Sources & assumptions

• RATIOXA — Methodology and formulas (2026-08-17)