Currently, the captivating film "Oppenheimer" is celebrating great success in the cinema and tells the moving story behind the invention of the atomic bomb. But off screen, there is an amazing connection between this historical event and your wealth accumulation. This connection is called the compound interest effect. Much like the exponential chain reaction of an atomic bomb explosion, compound interest can multiply your money. In this blog post, we reveal what compound interest is all about:
What is compound interest?
Compound interest is a phenomenon that occurs when you earn interest on your interest. This means that you not only make money by investing your capital, but also by reinvesting your previous earnings. As a result, your wealth grows faster and faster the longer you invest it.
So you can think of compound interest like an atomic bomb. When an atomic nucleus is split, neutrons are released that can split other atomic nuclei. This triggers a chain reaction that produces more and more energy. Similarly, when you earn interest, your capital increases, which in turn generates more interest. This leads to an exponential growth of your wealth.
How does the compound interest effect work?
The compound interest effect depends on three factors: the initial capital, the interest rate and the investment period. The higher these factors are, the stronger the compound interest effect. To calculate the compound interest effect, you can use the following formula:
Final capital = Initial capital × (1+interest rate) Investment duration.
Kn = K0 × (1 + p/100) n
For example: If you invest CHF 10,000 (K0) and receive an annual interest rate of 5% (p), after 10 years (n) you will have CHF 16,288 (Kn) in your account. But if you wait 20 years, you already have 26,533 CHF. And if you wait 30 years, you have 43,219 CHF! That is more than four times your initial capital!
How can you use the compound interest effect?
As you can see, compound interest can make a huge difference when it comes to your financial future. That's why you should start saving and investing as early as possible to get the most out of compound interest. You should also look for investment options that offer you a high and constant interest rate, such as stocks or ETFs.
Compound interest is one of the most important lessons you can learn in finance. It can help you reach your investment goals faster and easier. It can also show you how powerful time is when it comes to your money. As the famous physicist Albert Einstein is reputed to have said, "Compound interest is the eighth wonder of the world. Those who understand it deserve it; those who don't understand it pay it."