The next calculation uses the new balance
With compounding, growth retained in the balance becomes part of the base for a later calculation. The percentage may stay the same while the amount it produces changes. This is a repeated percentage relationship, not the addition of the same fixed amount each time.
State the model before using it
A simple illustration may assume a fixed rate, one calculation per period, no withdrawals, and no additional costs. Write down those assumptions. Actual investment results can vary, include losses, and be affected by fees, taxes, and the timing of money moving in or out.
Common misunderstanding: the illustration predicts an investment
A neat upward sequence follows from the assumptions selected for the example. It does not establish that a real investment will grow at that rate or avoid losses. Use the model to understand the arithmetic and examine its conditions.
Worked example
Two periods at an illustrative 5%
Assume 1,000 grows by 5% at the end of each of two periods, with no other changes. After the first period it is 1,050. The next 5% is calculated on 1,050, adding 52.50 and producing 1,102.50. The second addition is larger because its base is larger. The rate is a teaching assumption, not a return forecast.