Compound interest
Compound interest means the interest you earn is added to your money and, from then on, earns interest too. It works like a snowball that keeps growing.
Simple versus compound interest
With simple interest you only earn interest on the original amount. With compound interest you earn interest on the original amount plus the interest already accumulated.
An example with numbers
You put in €1,000 at 5% a year:
- After 1 year you have €1,050.
- After 2 years, €1,102.50 (in the second year you earn 5% on €1,050).
- After 10 years, about €1,629. With simple interest it would be €1,500.
The difference looks small at first, but it grows every year.
The rule of 72
A mental shortcut for how long your money takes to double: divide 72 by the annual return. At 6% it would take about 12 years (72 ÷ 6). It is an approximation, not an exact calculation.
What matters most: time
Time matters more than the amount. Someone who starts early with a little can end up with more than someone who starts late with a lot, because their money has had more years to earn interest on interest. You can test it with Ondexi's savings calculator by changing the number of years.
Careful: it works against you too
Compound interest also applies to debt. If you do not repay a credit card or an expensive loan, interest is added to the debt and it grows faster than it seems.
What to remember
The examples assume a constant return. In real life, investments go up and down and returns are not guaranteed, except in specific products such as some deposits.
Interest earns more interest. The sooner you start and the longer you leave your money, the bigger the effect, both in your favour and on debts.
Informational and educational content. Not financial advice.