Chapter 3
Compound Interest
This is the most important chapter in this guide. If you only remember one thing, make it this:
Your money makes money. Then that money makes money too.
That's compound interest. And it's the reason investing works.
A simple example
Let's say you put €1,000 into an investment that grows 10% per year.
- Year 1: You earn €100. You now have €1,100.
- Year 2: You earn 10% on €1,100 = €110. You now have €1,210.
- Year 3: You earn 10% on €1,210 = €121. You now have €1,331.
See what's happening? You're not adding any extra money. But the amount you earn gets bigger every year — because you're earning returns on your returns.
| Year | You have | You earn | New total |
|---|---|---|---|
| 0 | €1,000 | — | €1,000 |
| 1 | €1,000 | €100 | €1,100 |
| 2 | €1,100 | €110 | €1,210 |
| 5 | €1,464 | €146 | €1,611 |
| 10 | €2,358 | €236 | €2,594 |
In year 1 you earned €100. In year 10 you earned €236 — more than double — without adding anything.
Why it feels slow at first
Here's the frustrating part: in the beginning, compound interest barely does anything.
You invest every month and your total barely moves. It feels like a lot of effort for very little result.
This is normal. In the early years, most of your portfolio is just your own money. There isn't much for compound interest to work with yet.
This is where most people give up. But this is exactly where the magic is quietly getting started.
What €250 per month actually becomes
This is where it gets exciting. What if you invest €250 every month and earn an average of 10% per year?
| Years | You put in | It's worth |
|---|---|---|
| 5 | €15,000 | ~€19,000 |
| 10 | €30,000 | ~€52,000 |
| 15 | €45,000 | ~€115,000 |
| 20 | €60,000 | ~€260,000 |
| 25 | €75,000 | ~€575,000 |
Read that again. After 20 years, you put in €60,000 of your own money — but you have €260,000. The extra €200,000? That's compound interest. Money your money made.
After 25 years, almost all the growth comes from compound interest, not from your monthly deposits.
The hockey stick
If you draw this on a graph, it looks boring and flat for years. Then it slowly curves upward. And then it shoots up like a rocket.
This shape is called a hockey stick. The first half feels like nothing is happening. The second half is where the magic lives.
You can't skip to the exciting part. You can only get there by staying invested through the boring part.
Einstein called compound interest the 8th wonder of the world. Now you know why.
Why not just let the bank do it?
Banks charge 1–2% per year to manage your money. That sounds small, but those fees compound against you over decades. A bank fund charging 1.5% can eat up 30–40% of your total returns over 25 years.
A cheap ETF charges 0.07–0.20%. Buy it yourself through a broker like DEGIRO — 10 minutes to set up — and keep the difference compounding in your favor.
