We get it. Investing is a task that’s easy to procrastinate on – especially if your bank balance is reassuringly healthy.
Yet, the No. 1 factor that will make you a successful investor is TIME. That’s thanks to compound interest, the most powerful force for growing your wealth.
Compound interest happens when your money earns interest… and then it earns interest on that interest… and interest on that interest… and so on.
Think of your investment as if it’s rolling down a hill like a snowball, growing bigger and bigger as time goes on.
The important term here is as time goes on.
The numbers are clear: Assuming the average annual stock market return of six percent, a 10,000 euro investment will grow by more than 3,300 euros in 5 years – without you making any additional deposits.
Meanwhile, the compounding effect on 10,000 euros in your bank account is so minuscule that it barely produces a fraction of a single centime. Your money only earns around 0.01 percent interest in a German bank account, which is too insignificant to cultivate any benefit of compound interest.
Compound Interest Explained
This table shows how 10,000 euros will grow, even when no additional investment is made. Thanks to compound interest, an investment in the stock market will double approximately every 12 years.
|Stock Market||Bank Account|
|Year 0||EUR 10,000||EUR 10,000|
Each figure has been rounded to the nearest euro.
To make sense of this, let’s use the compound interest calculation example of two everyday investors: Marco and Max.
They each invest 10,000 euros in the same diversified stock market strategy.
In the year 2028, they withdraw their money.
Marco has 17,908 euros.
But Max has just 13,382 euros. A full 4,526 euros less.
Remember, they each invested in the same portfolio of stocks, and to allow a fair comparison, we will assume both achieved the average annual stock market return of six percent.
So what did Marco do differently?
He got started right away, while Max didn’t get around to investing his money until 2023 – a full 5 years from now.
Even though Marco never added money to his investment, compounding interest meant he ended up with A LOT more than Max the procrastinating investor.
With that money, Marco could go on a month-long trip, buy a top-of-the-line mountain bike, or a fancy designer sofa. Of course, he could also keep the money invested – it would grow to more than 42,000 euros in 25 years.
Calculate compound interest online
You can work out your own investment trajectory with this simple online compound interest calculator.
Or, calculate compound interest yourself using a formula like this…
(10,000 X 1.06) X 1.06 X 1.06 X 1.06 X 1.06 = 13,382 euros
That’s the compound interest on a 10,000 deposit, assuming 6 percent annual return over a 5 year time period.
As you will notice, compound interest becomes more impressive (or perhaps more frightening) over time.
Not in a position to invest 10,000 euros?
Here’s some great news. By making monthly contributions of 100 euros, your investment will grow even bigger than the numbers we’ve mentioned so far.
Let’s say you took 100 euros each month and put it into the same diversified stock market strategy as Marco. In 20 years, you will have 45,344 euros (24,000 in direct contributions and more than 20,000 of pure profit).
In 30 years, your nest egg will have more than doubled again – to 97,451 euros.
N.B. If you go down this route of small monthly contributions, check the investment provider does not charge fees each time money is added to the investment. Inyova does not do this, but many do.
Why You Should Consider a Savings Plan
Our goal is to make it as easy as possible for you to add money to your investment through an automatic payment.
Let’s say you invested 10,000 euros, and then added 1,000 euros annually.
That’s around 83 euros a month – less than the cost of going out for dinner.
As countless behavioural psychologists have noted, you won’t miss that money. Because it automatically moves into your investment, you never experience the negative emotions around “giving it up”.
Instead, you get the extremely positive emotions of your wealth growing substantially.
In 20 years, your nest egg will grow to an impressive 68,857 euros. In 30 years, it will be 135,493 euros. That’s an epic six-figure achievement – cumulative compound interest and cumulative saving at their best.
Naturally, the earlier deposits experience the most compounding interest. Assuming an average return of six percent per year, the first 1,000 euros deposited would be worth 3,207 euros at the end of a 20-year investment term and 5,743 at the end of a 30-year investment term.
Basically, for those early deposits, the return on investment is 5.7 times more than what you put in.
Compound interest calculator with monthly contributions
|One-off EUR 10,000
|Monthly EUR 100
|One-off EUR 10,000 +
EUR 1,000 added each year
|Year 50 contributions||10,000||60,000||
|Year 50 profit||174,202||297,883||
Each figure has been rounded to the nearest euro.
The bottom line
If there’s one point you take from this article, it’s this: Don’t let your hard-earned cash wither away in a low-interest bank account.
Even small investments make a difference – so long as you start early. The sooner you invest, the bigger the boost your money will get from compound interest.
Getting started is easy. The first step is to get your free investment strategy (coming soon for EU customers!). Using our easy online tool, you pick what areas you’re interested in (things like renewable energy, electromobility, and technology), and what values are important to you (things like human rights, low emissions, and gender equality). You’ll also have the option to exclude companies with interests in nuclear, tobacco, alcohol, weapons, and warfare. After that, you’ll see the exact list of companies we recommend for you. These will be selected according to your values, interests, risk profile, and financial goals.
Get your personalised impact investing strategy here – it’s free and non-binding. Using our easy online tool, you pick investment themes based on your personal values and interests.
By investing, you not only support a company’s success, you become part of that success… growing your savings and having a positive impact on the world at the same time.