Compound interest explained (why time is everything)
Compound interest is the effect of earning returns not only on your initial money, but also on the returns that money already generated. It's a snowball: each year, the base you grow from is bigger, so the growth accelerates on its own. Einstein supposedly called it "the eighth wonder of the world", and though the quote is dubious, the maths is undeniable — and it's why time matters more than almost anything else when investing.
Simple vs compound interest: the difference that changes everything
With simple interest, you always earn the same on your initial capital. With compound interest, returns are reinvested and go on to generate their own returns. At first the difference seems small; over the years, it becomes vast. A clean example: €1,000 at 8% a year.
| Years | Approximate value |
|---|---|
| 10 years | ~€2,160 |
| 20 years | ~€4,660 |
| 30 years | ~€10,060 |
| 40 years | ~€21,720 |
Notice the pattern: from year 30 to 40, the money grows more (about €11,600) than in the first 30 combined (about €9,000). That's the acceleration: the last decade does more than the first three because the base is already huge.
The brutal lesson: starting early beats picking the asset
The factor that weighs most in compound interest isn't the return, nor the initial capital: it's time. Someone who starts investing at 25 with modest amounts usually ends up with more than someone who starts at 40 with double the money, simply because they gave the snowball more years to roll. You don't need to find the winning stock of the century; you need to start and let time work.
The two enemies of compound interest
- Interrupting the process: pulling the money out halfway cuts the snowball right when it was about to accelerate. Consistency is half the secret.
- High costs: a 2% annual fee versus 0.2% seems a small difference, but compounded over decades it can cost you a huge slice of the final result. That's why obsessing over cost (an ETF's TER, for example) pays off so much.
How to put it on your side
Compound interest isn't a strategy, it's a force — your job is not to get in its way: start as soon as possible, contribute consistently, minimise costs and don't interrupt the process out of panic. It combines naturally with the DCA strategy of periodic contributions and with cheap vehicles like index ETFs. The least spectacular formula in the world — and that's why it works.