In short
- With compound interest, the interest you earn is added to your balance and starts earning interest too.
- Time is the biggest factor: starting earlier counts for more than adding a little more.
- No return is guaranteed: use cautious figures.
What it is
When you save or invest, your money can earn a return. If you leave that return in and it is added to what you already had, next year you earn interest on a larger amount. That is compound interest: interest on interest.
A worked example
You start with €5,000 and set aside €200 a month for 20 years, at a 5% annual return.
| What you put in | €53,000 |
| Interest earned | €42,770 |
| You would end up with | €95,770 |
Monthly compounding, contributions at the end of each month, no taxes or fees.
Why time matters so much
Almost half of the result in the example is interest, and most of it arrives in the final years, when the balance is already large. That is why delaying the start by a few years usually costs more than contributing a little less each month.
The return matters too: with the same contributions, at 3% you would have €74,764 and at 7%, €124,379. A small difference in the percentage becomes a big difference over the years.
Work it out with your figures
Try different contributions, time periods and returns in the calculator and compare scenarios.