Investing
Compound interest explained with real examples
Compound interest makes your money earn returns, and those returns go on to earn further returns of their own. It's why starting early usually matters more than investing large amounts.
Simple interest vs. compound interest
With simple interest, you only earn returns on your initial contribution. With compound interest, each year you also earn returns on previous years' gains — your money grows in an accelerating way, not a straight line, the longer time goes on.
An example with numbers
If you invest €10,000 at 7% annual return, in 10 years you'll have about €19,700: the interest earned (€9,700) is almost equal to your initial contribution. In 20 years, you'll have about €38,700 — the interest earned (€28,700) is now nearly triple what you put in. Returns don't grow in a straight line: they accelerate over time.
Why starting early matters more than contributing a lot
Someone who invests €200/month for 30 years ends up with more than someone who invests double (€400/month) but starts 15 years later, even though the second person contributes more money in total — the time your money spends earning compound interest outweighs the amount contributed.
The effect of regular contributions
You don't need a large starting capital: contributing a fixed amount each month (to an index fund, for example) also benefits from compound interest, because each contribution starts earning returns from the moment you make it.
What compound interest can't do
Compound interest doesn't remove risk: a 7% annual return is a historical average, not a guarantee, and markets have good years and bad years. It also doesn't make up for starting out with high-interest debt: if you're paying 20% interest on a credit card, that compound interest is working against you, not for you.
Frequently asked questions
What annual return is realistic to expect?
It depends on the type of investment and the risk taken on. Broad stock market indices have historically averaged around 6-8% a year over the long term, but with sharp ups and downs along the way — it isn't a guaranteed figure.
Does compound interest apply to debt too?
Yes, and against you: if you don't pay off interest-bearing debt (a credit card, for example), interest accrues on the outstanding balance, which then generates more interest. It's the same mechanism, just working against you.
How often is compound interest calculated?
It depends on the product: it can be annual, monthly, or even daily. The more frequent the compounding, the slightly higher the final result, though the main effect is still the total time invested.
Is it worth waiting until you have more money to start investing?
Usually not: since time is the factor that matters most, waiting years to build up a larger capital usually turns out worse than starting earlier with smaller contributions.
Put it into practice
Simulate your own case: enter the starting capital, the monthly contribution, and the years, and compare the result with and without regular contributions: