What is…? Compound interest?

Compound interest – what does that mean exactly? We asked people on the street.

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Good old interest – it’s usually a great thing, but can sometimes cause confusion. Do you receive or pay it? And what about compound interest? Do you have to pay more, or do you actually receive interest on interest? In other words, interest squared?

You don’t have to be a maths genius to understand and benefit from compound interest. It’s actually quite simple:

compound interest is actually the interest you receive on interest already paid. The best way to explain this is to use an example: you invest CHF 100 for a year and receive 10% interest. At the end of the first year, you receive CHF 10 in interest, so you now have CHF 110. If you invest this money, at the end of the second year you receive 10% interest on your original CHF 100 plus the CHF 10 in interest from the first year – this amounts to CHF 11, providing a total of CHF 121 after the second year. That may not sound like a lot, but over a long-term investment horizon, it’s well worth it – because the compound interest increases more sharply each year (compound interest effect). In this example, your total assets would amount to CHF 672.75 after 20 years – and that’s with a one-off original payment of CHF 100. After 30 years, you would have CHF 1,744.94.

Exactly how this compound interest effect works is explained in detail in the article «The compound interest effect explained in simple terms».

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