Compound interest

In short: With compound interest, interest earns interest: the balance grows each year not just from the starting amount, but also from interest already credited.

In more detail: Formula: final amount = starting amount × (1 + interest rate)^years. €1,000 at 3 % becomes 1,000 × 1.03^10 ≈ €1,344 after 10 years. With simple interest it would be €1,300.

In Depth

Not investment advice.

• Rule of 72: Divide 72 by the interest rate in percent to get the rough doubling time. At 6 %, about 12 years.
• The other direction with loans: With debt, compound interest works against the borrower, especially with overdraft and credit card interest.
• Effective annual rate: It shows the actual yearly burden of a loan including fees and payments within the year.
• Inflation: An interest rate below inflation reduces purchasing power despite the increase.
• Time beats amount: Starting early works more strongly than saving more later.

See also: Inflation, Emergency fund