Compound Interest Explained
Compound interest means your returns earn returns of their own. Invest 100 €/month for 30 years at 7 % and you pay in 36,000 € — yet you end up with around 122,000 € in your portfolio. The lion’s share is compound interest. Here is the effect with an example, a table, and the Rule of 72.
What compound interest means
With simple interest you earn a return only on your original deposit each year. With compound interest the returns are reinvested and go on to earn returns of their own — a snowball effect. The longer you stay invested, the stronger it works, because over time the reinvested returns make up the largest part of the growth.
Example: 100 € a month over the years
Portfolio value at 100 €/month and 7 % p.a. (example)
| Term | Paid in | Portfolio value |
|---|---|---|
| 10 years | 12,000 € | ~17,300 € |
| 20 years | 24,000 € | ~52,000 € |
| 30 years | 36,000 € | ~122,000 € |
| 40 years | 48,000 € | ~262,000 € |
Notice the jump: over 40 years instead of 30, the final amount more than doubles — for just 12,000 € more paid in. That is the power of time.
The Rule of 72 for mental math
A simple rule of thumb: 72 divided by the interest rate = years until your money doubles. At a 7 % return your money therefore doubles roughly every 10 years (72 ÷ 7 ≈ 10). At 4 % it takes about 18 years, at 9 % just 8 years. That’s how you estimate compound interest without a calculator.
Your final amount is driven by your savings rate, your return and time. You can raise the savings rate immediately and influence the return only to a limited degree — but time is the most powerful and at the same time the scarcest ingredient. Starting early beats almost any later optimisation. Caution: inflation and taxes reduce the real effect.
FAQ — Compound interest
What is the compound interest effect, explained simply?
Compound interest means your returns are reinvested and then earn returns of their own. Your wealth therefore grows not in a straight line but at an accelerating pace — like a snowball that gets bigger as it rolls. The longer the money works, the more compound interest dominates over the deposits you actually made.
How much does 100 € a month turn into?
Saving 100 € a month for 30 years at an assumed 7 % return per year, you pay in 36,000 € and end up with around 122,000 € — more than 86,000 € of that is compound interest. Over 40 years, at the same savings rate, it would even be around 262,000 €. These are illustrative figures, not a guarantee.
What is the Rule of 72?
The Rule of 72 is a rule of thumb for estimating how long it takes your money to double: divide 72 by the interest rate. At 7 % your capital doubles roughly every 10 years, at 4 % every 18 years. It gives a quick approximation without an exact calculation.
Why is time so important for compound interest?
Because the effect is exponential: over the years the reinvested returns make up the largest part of the growth. The final years of a long term contribute the most in absolute terms. That is why starting early is more powerful than saving more later on.