Compound interest calculator: how to make more out of your money

When you invest money, you earn interest on it. It’s a kind of reward for lending your capital and taking an investment risk.

Compound interest occurs when the interest received (e.g. interest payment on a bond or the dividend on an equity) is not paid out, but is reinvested. The reinvested interest logically also generates income, as it accrues interest along with the rest of the capital.

In short:

• Interest is the return on your invested capital.
• Compound interest is the return on the interest that you reinvest.

We explain more about compound interest and the compounding effect in our blog post.

The compounding effect may sound complicated, but the principle is quite simple: if interest is repeatedly reinvested to generate compound interest, total assets increase exponentially. The easiest way to explain this is with an example.

Example:

If you invest CHF 1000 per annum at 5% interest and reinvest your interest automatically, after ten years you won’t just accumulate CHF 1500 from your original capital, but CHF 1629 thanks to the interest on the reinvested interest.

The longer the term and the higher the interest rate, the stronger the compounding effect.  

If you want to make optimal use of the compounding effect to grow your assets, follow these tips:

• Invest your money instead of parking it: interest rates on savings accounts are so low that the compounding effect hardly has any impact. To take advantage of this mechanism, focus on investments with higher returns, such as accumulation funds or ETFs.
• Invest for the long term: time is the decisive factor. The longer your capital remains invested, the stronger the compounding effect.
• Reinvest income: interest, dividends or profits should be reinvested. This is the only way to earn compound interest and let your assets grow exponentially.
  

Although equities do not generate interest, you can still benefit by investing in them: the compounding effect results from dividend reinvestment and price gains that remain in the portfolio.

If you don’t get your dividends from equities or ETFs paid out, but reinvest them automatically, you benefit from the same principle: your capital grows through returns, which in turn generate new returns.

Price gains (e.g. the price of a share) that you haven't cashed in also contribute to growth. With accumulation funds or ETFs that automatically reinvest income, compound interest is already a key component of the strategy.