Compound interest effect

On money, such as that in an account, you earn interest. If you don’t spend that interest and continue saving, you will earn interest not only on the original amount but also on the interest from the previous period. As a result, the annual interest income continuously increases, and you receive more interest each year than the previous year.

Today, savings accounts offer relatively low interest rates, so the compound interest effect is correspondingly small.

However, the compound interest effect also applies to investments. Here, it has a much greater impact due to higher (expected) returns.

When returns from securities, such as interest and dividends, are reinvested, new returns are generated, which are then reinvested, and so on. Over the years, the invested capital grows more and more.