The power of compound interest: How to make your money work alone
💡 Quick Tip
Discover the "eighth wonder of the world." Learn how reinvesting your profits generates a snowball effect that multiplies your wealth exponentially over time, allowing you to achieve financial freedom through constant contributions.
What is compound interest?
Compound interest is the interest calculated on the initial principal and also on the accumulated interest of previous periods. Unlike simple interest, where profits are withdrawn, here profits are reinvested to generate new profits. It is, literally, putting your money to work to manufacture more money for you.
The three pillars of growth
- Time: The most determining factor. The earlier you start, the more time the snowball has to grow.
- Returns: The annual profit percentage. An extra 2% maintained over decades drastically changes the final result.
- Consistency: Making periodic (monthly) contributions accelerates the process by increasing the base for interest.
Patience is your best ally
At first, growth seems slow and boring. However, an "inflection point" arrives where the curve turns vertical and interest generated far exceeds your monthly contributions.
📊 Practical Example
Practical example with real numbers
Comparing two savers with a €1,600 salary:
- Saver A (Simple Interest): Saves €200/month in a drawer. After 30 years, they have €72,000.
- Investor B (Compound Interest): Invests €200/month at an average 8% annual return.
After 30 years, Investor B has contributed the same €72,000, but their account is worth approximately €298,000. The €226,000 difference is the power of compound interest.
