The power of compound interest plays a crucial role in building long-term wealth. While many are aware of this, few can truly grasp the significant impact it can have on their investments over time.
That's why we've created this compound interest calculator for you. With just a few simple inputs, it clearly demonstrates the effect of compound interest and helps you easily calculate its potential on your investments.
If you invest xxx€ a month at xxx% over xx years, you will end up with a final capital of €xxx. These consist of €xxx in deposits and €xxx in interest or capital gains.
The idea behind the compound interest calculator – Think back to the winter of 2020, when COVID-19 case numbers skyrocketed, and it was hard to fathom how quickly they multiplied. This rapid increase was due to exponential growth, a concept we're all familiar with after the pandemic. Exponential growth means that the increase isn't steady, like 2,000 new cases every day. Instead, the numbers rise at an accelerating rate – 2,000 cases become 4,000, then 16,000, and soon 256,000. We saw the destructive power of exponential growth during COVID-19. However, when it comes to investing, exponential growth works in your favor, and that's where compound interest comes into play.
When you invest, you earn interest – profit on your investment. You could withdraw this interest every year to buy something like a new phone, but if you leave it invested, you earn interest on your interest. How does that work? Let me give you an example: if you start with €1,000 and contribute €100 monthly for 30 years, your total contribution would be €37,000. But your investment account wouldn’t just show €37,000; it would grow to over €90,000. So where did the extra €53,000 come from? That's the magic of compound interest – its exponential growth. Just like the COVID-19 numbers, you didn’t actively do anything for that extra money; your investment grew on its own.
Even Einstein referred to compound interest as the "Eighth Wonder of the World" because it's one of the simplest ways to grow wealth. Consider this example: Anna starts investing at age 20, while Lukas begins at 30. Both invest €200 a month until they turn 60. Thanks to her 10-year head start, Anna ends up with €620,000, while Lukas accumulates only €270,000. Of Anna’s total, €525,000 came from compound interest alone, compared to just €200,000 for Lukas. The lesson here is clear: the sooner you start investing, the more you benefit from the power of compound interest. Let your money work for you!
This is how you use the compound interest calculator. You already know that you can benefit from compound interest when you invest. The sooner you start, the better! Let's take a look at the information you need to enter in order to calculate your potential compound interest effect.
Initial capital. This is the money you may have already invested or have set aside, ready to be invested. However, it’s essential to always maintain a reserve for unexpected emergencies, like a broken washing machine or car repairs. A common rule of thumb for an "emergency fund" is to have about two months' worth of net salary saved and easily accessible. If you don't have any initial capital available at the moment, simply set the slider to 0. You’ll be surprised by how much you can achieve through consistent monthly contributions alone!
Monthly Contributions: This is the amount of money you plan to invest each month. A good rule of thumb is to aim for 20% of your income. However, don't feel pressured by this figure. You can always start with a smaller amount and gradually increase your contributions over time as you work toward the 20% target. The key is consistency, no matter how much you start with.
Investment Horizon: This refers to the length of time you plan to keep your money invested. For example, if you're investing for retirement, you can calculate your horizon by subtracting your current age from the retirement age (currently 67). You may also invest for other goals, like purchasing a home or saving for your children’s future. However, it's important not to invest money that you'll need in the near future, as markets can fluctuate. If you’re forced to sell investments during a downturn, you may incur losses.
Interest Rate: The interest rate is the most unpredictable factor in calculating compound interest. We're talking about an average rate here, as some years may outperform others. Historically, the MSCI World Index has provided an average return of 9% since 1975, which can serve as a useful benchmark for your calculations. However, if you diversify your portfolio with safer investments like bonds, your average return may be lower. Keep this in mind when estimating your potential gains.
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