# Compound Interest Formula With Monthly Investment Increase

I'm looking to solve this problem:

If I were to start investing now, With a 4% annual return compounded monthly what is the function for my return if my monthly input is initially \$2000 then for every month here after 2% is added. For example:

month 1 deposit = 2000

month 2 deposit = 2040

month 3 deposit = 2080.80 etc.

I understand the compound interest formula with a uniform monthly deposit to be:

``````p*(i+1)^t + d * ((1+i)^t - 1)/(i) * (1+i)
``````

where p is our initial value, t is the number of compounding periods and d to be the periodic deposit. But I'm struggling to find the formula with the increase in the monthly deposit.

I have a feeling that there isn't a straight forward formula (I hope to be shown wrong!) but maybe it is possible to write a python script with a loop or a rrnewing d variable?

• Not sure how sustainable a 2% monthly increase in contributions is. By the end of year three your contribution amount has just about doubled... Nov 2, 2017 at 14:53

Disregarding the initial value `p` for the moment

the monthly interest rate `i = 0.04/12`

so with initial deposit `d = 2000` the value after three months is

``````d (1 + 0.02)^0 (1 + i)^3 +
d (1 + 0.02)^1 (1 + i)^2 +
d (1 + 0.02)^2 (1 + i)^1 = 6161.43
``````

This can be expressed as a summation with

``````t = 3
x = 0.02
`````` and the summation can be converted to a formula by induction Adding the initial value compounded over three months `p (1 + i)^t`

``````future value = p (1 + i)^t + (d (1 + i) ((1 + i)^t - (1 + x)^t))/(i - x)
``````
• Your `i` is wrong - `0.33%`(etc) monthly gives ~ `4.0742%` annual. `i` should be `(1.04)^(1/12)`, approx `0.003274`. Your algebra looks right though. Nov 2, 2017 at 14:51
• Depending on the product, they might advertise 4% annual return and it actually be 0.33% monthly, or it might be as you say @AakashM. Something to take into consideration one way or the other.
– Joe
Nov 2, 2017 at 14:59
• @AakashM If the interest rate is stated as "compounded monthly" that means it is a nominal rate. In the US APR is nominal and in Europe APR is effective. A nominal APR of 4% compounded monthly is equal to a 4.07415% effective annual interest rate. Nov 2, 2017 at 15:12