Compound interest explained, with examples
How growth on top of growth works, why time matters more than the starting amount, the rule of 72, and what fees and inflation do to it.
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Compound interest is growth on top of growth. Each year, the return applies not only to the money you put in but also to everything it has already earned. The effect is small at first and very large later, which is why time matters so much.
The same return, two ways
Put €1,000 away at 7% a year.
- With simple interest you would earn €70 every year, always on the original €1,000. After 30 years: €3,100.
- With compound interest, the €70 of year one also earns 7% in year two, and so on. After 30 years: €7,612.
| Years | Value at 7% a year, compounded |
|---|---|
| 10 | €1,967 |
| 20 | €3,870 |
| 30 | €7,612 |
Notice the pattern: the first 10 years add about €967; the last 10 add almost €3,750. Most of the growth arrives at the end.
The formula
With a single starting amount:
Final value = Starting amount × (1 + annual return)^years
For the example: 1,000 × 1.07³⁰ ≈ 7,612.
Adding a little every month
Regular contributions compound too. Putting €100 a month into something that returns 7% a year, you would contribute €36,000 over 30 years and end with about €116,900: more than three times what you put in.
Starting later changes a lot. The same €100 a month for 20 years ends at about €50,750, less than half, even though you only contributed a third less.
These figures assume the return is converted to its monthly equivalent and each contribution is made at the end of the month. You can try your own numbers in the compound interest calculator on Stok Terminal.
The rule of 72
A quick way to see how fast money doubles: divide 72 by the annual return. At 7%, 72 / 7 ≈ 10.3 years (the exact figure is 10.2). At 4%, about 18 years.
What works against it
- Fees. They compound too, against you. €10,000 growing at 7% for 30 years becomes about €76,100; at 6%, because of a 1% annual fee, about €57,400. The fee costs almost €18,700.
- Inflation. Prices rise over time, so €7,612 in 30 years buys less than €7,612 today. A simple way to see real growth is to subtract expected inflation from the return.
- Losses. Returns are not steady. A 50% fall needs a 100% gain to recover, and a bad year early on hurts less than the same year when the balance is large.
What to take from it
Compound interest rewards starting early and staying invested. It is not a promise of any particular return — markets can fall and the examples here use a fixed, illustrative rate — but it explains why time, costs and consistency matter more than timing.
