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Negative compounding calculator

Compounding works in both directions. What you earn goes on to earn more, and what you pay every year in fees and taxes stops earning for good. Enter your plan, what your product costs and how it is taxed, and compare the ideal result with the one that actually reaches your account.

Quick examples

Your investing plan

What you already have set aside to invest. Zero is fine.

The amount you can add every month without fail.

Your horizon. The longer it is, the more every friction weighs.

Before fees and tax. A diversified global portfolio has run around 7% a year over the long term.

Costs and tax

Charged every year on your whole balance, not on the gain. An index fund runs around 0.03–0.2%; an active fund with an advisor on top, 1.5% or more.

Simplified federal rates; state tax is left out. Each option explains when the tax falls and why it matters.

Actively managed fund, taxable accountHigh tax drag

When it is paid
Every year (Form 1099-DIV), and again when you sell.
How it works
Active funds trade often and pass dividends and realized gains on to you, taxable in the year they are paid even if you reinvest them. The calculator assumes 3% of the balance is distributed each year and taxed at 15%, with 15% long-term capital gains tax on what is left when you sell.
Effect on compounding
Tax leaves the portfolio every single year, so that money never gets to compound.
Worth knowing
If you hold one, a tax-advantaged account such as a 401(k) or an IRA is the place for it.

What fees and tax cost you

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Final value with no friction
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Net value after costs and tax
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Share of wealth lost
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Where the difference comes from

Total you contributed
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Fees paid
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Tax paid along the way
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Tax on the final sale
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Growth that money never earned
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Worth your contributions for
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An estimate with simplified tax rules, not a forecast or a tax return. The assumptions are set out below.

Your balance year by year with and without friction. The last point is the final sale, after tax.

How it works

The calculator runs two portfolios side by side, month by month, from the same inputs.

The first is the ideal one, with no costs of any kind. It is exactly the compound interest calculator, so the same inputs give the same figure:

ideal = ideal × (1 + annual return / 12) + contribution

The second is the real one. Each month it grows the same way, then pays the fee on the whole balance and, on the dates your tax regime charges something, that tax:

real = real × (1 + annual return / 12)
real = real − real × fee / 12 + contribution
real = real − tax for the period (when due)

At the end it pays the exit tax on the gain not yet taxed. The difference between the two portfolios is the total cost, and it has two parts: what you paid directly, in fees and tax, and the growth that money would have produced had it stayed invested. That second part is negative compounding, and with high fees and long horizons it is usually the larger of the two.

Assumptions and limits

  • The return is constant and gross: the fee is taken separately. In reality there are good years and bad ones, and the order they arrive in matters.
  • Tax is simplified: federal rates only, no state tax, no loss harvesting, no withholding, and no future changes to the law, which there will be.
  • Distributions are assumed at 3% a year for an active fund and 1.5% for an index ETF, all taxed at the long-term rate. Short-term gains taxed as ordinary income would make the active fund look worse, not better.
  • The figures are nominal: they do not subtract inflation.
  • This is not tax advice. Before choosing an account or selling a large position, it is worth going through your own case with a qualified professional.

Frequently asked questions

What exactly is negative compounding?

It is the same mechanism as compound interest, seen from the other side. Every dollar that leaves your portfolio early, as a fee or a tax, is not just lost: everything that dollar would have earned in the years left is lost with it. That is why the real cost of a friction is not what you pay but what you pay plus the growth you no longer get.

Why does a 1.5% fee take so much more than 1.5%?

Because it is charged every year on your whole balance, not on your gain. At a 7% gross return, a 1.5% fee takes more than a fifth of each year’s return, and that slice compounds. On a single sum invested for thirty years, it cuts the final value by more than a third.

Why is paying tax every year different from paying it at the end?

Because money paid at the end has been earning until the last day. At the same rate and the same return, being taxed when you sell leaves noticeably more wealth than being taxed every year along the way. It is called tax deferral, and it is why low-turnover index funds and tax-advantaged accounts are so effective over decades.

What if I am not taxed in the US?

This version of the calculator uses US rules. You can approximate another country with the option whose shape is closest to yours: tax only on sale, tax every year on what is distributed, or no tax at all inside a sheltered account. The Spanish and Portuguese versions of this page use the rules of Spain and Brazil.

Do you store what I enter?

No. The whole calculation runs in your browser in JavaScript; nothing is sent to a server and nothing is stored, apart from your currency choice if you change it.