Compound interest simply explained
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With compound interest, not only the capital you invest but also the returns already earned earn interest. Over long periods this can make a real difference.
The idea in one line
A return from one year works alongside your capital in the next year. The longer the term, the more that effect compounds.
The formula for a lump sum
End capital = initial capital × (1 + rate)^term
With monthly compounding, the annual rate is converted to a monthly rate, and additional contributions are added month by month.
An example
Assume CHF 10,000 and an average return of 5% per year. After 20 years the model shows roughly CHF 26,500, of which about CHF 16,500 is return.
Important: this is an example calculation based on an assumed average return. It is not a guarantee and not financial advice. Markets fluctuate.
What strengthens the effect
- Time: a longer term compounds more.
- Regular contributions: monthly payments enlarge the invested balance.
- Costs: taxes and fees are not part of this model but matter in reality.
Method
This is a purely mathematical model using the compound interest formula. No market data or historical returns are used.
Use the compound interest calculator to try your own values.
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Frequently asked questions
- What is compound interest?
- Returns already earned are themselves reinvested and earn interest, so capital grows faster than linearly.
- Are the results guaranteed?
- No. It is an example calculation based on an assumed average return; actual results may differ.