�۶���Ƶ

If you put your assets in a savings account or in various types of investments, you benefit from one major advantage: compound interest. Albert Einstein had already recognized the power of compound interest and described it as one of the most important mechanisms in finance: “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.” If you want to take advantage of compound interest, it’s important to understand how this growth in assets works. This is because the amount of compound interest isn’t always relevant enough to trigger the compound interest effect and increase your assets.

Put simply, interest is the fee that is due for borrowing money. For example, interest is charged when you take out a loan – i.e. borrow money from the bank or another institution. If you want to pay this money back at a later date, you must pay the fee in addition to the amount you originally borrowed.

You can also use this principle to your advantage in building your assets: for example, if you keep your money in a savings account. In this case, you are lending the bank the money you have in your savings account. The bank can then put this money to work until you want to withdraw it again. In other words, the bank borrows money from you and in return pays you a small fee known as interest based on the amount of money you have in your account.

The same applies to investments and bonds. In this case, you lend your assets to a company or the government. They can then use your money until you need it again. To “compensate” you for the use of your reserves, you receive a regular interest payment. You also receive this type of compensation if you hold shares in a company, but in this case it is referred to as a dividend.

As its name suggests, compound interest is interest paid on accumulated interest. It is of relevance when interest or dividends are paid out and reinvested. Interest is usually paid annually as a percentage of the existing capital. Compound interest only plays a role if, as an investor, you decide as soon as the interest is paid to reinvest the original assets and the interest amount you have received. In other words, you give the company, institution or government another opportunity to use this higher amount.

The next interest payment then comprises interest on this new total amount – and so you earn compound interest.

The compound interest effect has a particularly positive impact on the development of invested assets because the interest rate here is high enough to make a difference. This is also the reason why the compound interest effect is barely noticeable with a savings account. For these accounts, the average interest rate is just 0.3%, which hardly leads to an increase in assets in the long run. However, many types of investments offer higher interest rates that trigger the compound interest effect. This makes them a more effective method to accumulate assets than a savings account .

However, as an investor, you should always find out how high the expected interest will be for your chosen type of investment. Experts can put a rough figure on these values in advance to give you an idea of the extent to which the interest paid can positively influence your assets.

This means that compound interest doesn’t automatically have an effect on wealth accumulation. In addition to the type of investment, which influences the amount of compound interest due to the individual interest rate paid, there are other relevant factors to consider. Time has one of the biggest impacts. The investment period is the main factor determining how great the compound interest effect is. The more time that passes, the greater the increase in capital from interest and compound interest. That makes this factor particularly crucial when it comes to private retirement provision. Retirement provision usually involves a very long investment period, making it possible to fully exploit the compound interest effect. For short-term savings, the compound interest effect is of little or no relevance.

Another factor that plays a role alongside time is the return. This amount indicates how much interest in percent is paid on the invested assets and is influenced by a number of factors. In simplified terms, the return depends primarily on the amount of capital invested and the performance of the chosen type of investment. The higher the return, the faster the assets are able to grow due to the effect of compound interest.

This is why the amount of capital is also decisive for the compound interest effect. If you then directly reinvest the interest paid on the capital, your assets will grow faster thanks to the compound interest effect.

To find out exactly how compound interest works and what effects it can have, it’s worth taking a look at some sample calculations and simple formulas. Our example shows how great the effect of compound interest can be. If you would like to know how to calculate your expected compound interest, you need the formula below or the simplified Rule of 72.

The formula for compound interest

If you now want to calculate by exactly how much the compound interest rate will affect your savings, you can use a special formula. However, many investors find calculating it themselves to be too complicated and uncertain. For those looking for greater reliability, support is available from special investment calculators available online, such as the �۶���Ƶ Investment Calculator, or experts who help you to work out a financial plan.

A first rough idea of how compound interest will affect your assets can be obtained using the Rule of 72. It is often used as a simple way to determine how long it will take to double your invested assets. In the calculation, the number 72 is divided by the expected average annual return. This can be the interest rate on a savings account or the average return on an investment.

According to this rule, it will take 72 years for the assets to double due to the compound interest effect at an interest rate of 1%. By contrast, it will only take 36 years at an interest rate of 2% and 24 years at an interest rate of 3%.

You can also use this formula to calculate the interest rate you need in order to double your assets over a certain period of time. You can then select the appropriate types of investments or adjust your target investment period.

If you only save for retirement through a savings account, you will hardly notice the effects of compound interest. Interest rates in Switzerland have fallen steadily since 1992 from a maximum of 5.1% to the current average of 0.3%–0.5%. If you had CHF 50,000 in a savings account, the annual interest amount would be just under CHF 150. So you would not see any significant effect, even after several decades.

Comparing the various types of investments can help you to obtain greater benefit from the compound interest effect. Diversified and low-risk investments can increase the compound interest effect, for example. At the same time, successful higher-risk investments can smooth out temporary losses over a longer term and lead to higher returns. It’s worthwhile obtaining personalized advice tailored to your risk profile.

Compound interest helps you to increase your assets – at best exponentially – without any effort on your part. However, to benefit from the compound interest effect, you need to ensure that you take into consideration the most important factors: the investment period, the invested capital and the expected returns. If you want to be certain that you are getting the maximum benefit from the compound interest effect, it’s worth arranging a personal consultation. Our experts will be happy to assist you.