Compound interest – how to make interest work for you

Compound interest – how to make interest work for you
Compound interest – how to make interest work for you
unsplash (c)
Share post:

In times like these, with the cost of daily living on the rise, it is important to have savings – especially given the unpleasant surprises that life invariably brings. If the washing machine, the refrigerator, or something else breaks down, you don’t want to wait forever to buy a new appliance. It is easier to quickly fix a sudden problem if you have put aside a little money than if you have nothing or not enough.

But what to do when money is tight? Creating a cash reserve is already possible with small amounts starting at EUR 50. And let’s be honest: maybe there is something you can do without for once in order to do the right thing for your own future? However, if you can raise those EUR 50, it is not yet clear how you can double or multiply it.

Hooray – interest is back!

The first thing you need is interest. The good news: interest is back again! Anyone who already has a savings book knows that interest rates have been meagre for many years. Since 21 July last year, things have changed. That’s when interest rates started to rise sharply. The reasons are obvious: the strong inflation, especially because of the high energy prices and the costs of daily living. After the start of the Ukraine war, inflation intensified: food prices, costs for restaurant visits, etc. also skyrocketed.

The interest rate policy, i.e. deciding whether key-lending rates rise or fall, is the task of central banks such as the European Central Bank (ECB). The ECB is responsible for the countries that have the euro as their currency. By raising rates, central banks such as the ECB try to curb inflation. They pursue an inflation target of no more than 2% per year. While we are miles away from that today, we have also come a long way back from the high in the winter months, albeit not to the same extent across the board.

Interest is the price of borrowing money. That there is now some (interest) again is a good sign. The fact that it was at zero for years was a consequence of some crises that happened a while ago.

Benefiting from interest and compound interest

Interest ensures that the money in the savings account or invested in securities grows. If you have already saved or invested some money, you will receive interest on the interest again. This is compound interest. Compound interest makes your money grow even faster, especially if you don’t touch the money for years and interest rates are high.

A primer on the compound interest effect

We make a lump-sum deposit of EUR 100. After one year, the bank pays us interest on our money. At 1% we have EUR 101 after one year, at 2% it is 102 etc. (please refer to the table). The capital gains tax, which is normally deducted from this interest, is being disregarded for the purpose this example.

If you leave the EUR 100 in the deposit, the amount of money that earns interest in the second year grows. As a result, you get interest on the interest. In the 1% example you are at EUR 102 after two years. After five years you are at EUR 105 and after ten years more than EUR 110, (please see the table). This is called the effect of compound interest.

DepositInterest (rate)

If the interest rate is not 1% but 5%, for example, the amount grows to EUR 127 after five years and to more than EUR 162 euros after ten years, and to an impressive EUR 432 after 30 years, thanks to interest and compound interest alone. You haven’t paid in a single additional cent. The higher the interest rate and the longer the savings period, the higher the return earned with interest and compound interest.

How EUR 10 turns into 100

To turn EUR 10 into 100, i.e. to increase the amount paid in tenfold, two things are necessary, as our calculation shows:

  • A high annual interest rate of almost 8% (including compound interest)
  • A long holding period of 30 years
Initial value10
YearsFuture value100
1Compound interest900.00%
2Compound interest216.23%
3Compound interest115.44%
5Compound interest58.49%
10Compound interest25.89%
20Compound interest12.20%
30Compound interest7.98%

How do you do that? Only with securities and more risk. You have to be ready for it, and you also have to have the necessary time! But basically, it’s not witchcraft. You open a securities account at the bank, something similar to a deposit account except that it is just for securities. The general motto is: don’t put all your eggs in one basket, i.e. don’t buy just one asset. Instead, spread the risk over many. How does that work? Funds, for example, can be a suitable option. With funds, you can spread your money over different assets when you buy a share for as little as EUR 50. If you follow the five golden rules, there is not much that can go wrong.


If expenses are high and money is tight, good advice is hard to come by. Putting some money aside not only makes sense to have reserve funds to call on when needed. Thanks to interest and compound interest, the amount grows year after year. In order to improve the earnings potential, investing and a fund savings plan can be a promising option.

For a glossary of technical terms, please visit this link: Fund Glossary | Erste Asset Management

Legal note:

Prognoses are no reliable indicator for future performance.

Please note that investments in securities involve risks as well as opportunities.


Legal disclaimer

This document is an advertisement. Unless indicated otherwise, source: Erste Asset Management GmbH. Our languages of communication are German and English.

The prospectus for UCITS (including any amendments) is published in accordance with the provisions of the InvFG 2011 in the currently amended version. Information for Investors pursuant to § 21 AIFMG is prepared for the alternative investment funds (AIF) administered by Erste Asset Management GmbH pursuant to the provisions of the AIFMG in connection with the InvFG 2011. The fund prospectus, Information for Investors pursuant to § 21 AIFMG, and the Key Information Document can be viewed in their latest versions at the web site within the section mandatory publications or obtained in their latest versions free of charge from the domicile of the management company and the domicile of the custodian bank. The exact date of the most recent publication of the fund prospectus, the languages in which the Key Information Document is available, and any additional locations where the documents can be obtained can be viewed on the web site A summary of investor rights is available in German and English on the website as well as at the domicile of the management company.

The management company can decide to revoke the arrangements it has made for the distribution of unit certificates abroad, taking into account the regulatory requirements.

Detailed information on the risks potentially associated with the investment can be found in the fund prospectus or Information for investors pursuant to § 21 AIFMG of the respective fund. If the fund currency is a currency other than the investor's home currency, changes in the corresponding exchange rate may have a positive or negative impact on the value of his investment and the amount of the costs incurred in the fund - converted into his home currency.

This document serves as additional information for our investors and is based on the knowledge of the staff responsible for preparing it at the time of preparation. Our analyses and conclusions are general in nature and do not take into account the individual needs of our investors in terms of earnings, taxation, and risk appetite. Past performance is not a reliable indicator of the future performance of a fund.

Leave a comment Required fields are marked with *

Your email address will not be published. Required fields are marked *