{"id":8756,"date":"2019-02-22T20:15:02","date_gmt":"2019-02-22T19:15:02","guid":{"rendered":"https:\/\/www.smolio.ch\/wissen\/the-compound-interest-effect-your-ally-for-retirement-provision\/"},"modified":"2025-03-21T21:19:54","modified_gmt":"2025-03-21T20:19:54","slug":"the-compound-interest-effect-your-ally-for-retirement-provision","status":"publish","type":"post","link":"https:\/\/www.smolio.ch\/en\/wissen\/the-compound-interest-effect-your-ally-for-retirement-provision\/","title":{"rendered":"The compound interest effect: your ally for retirement provision"},"content":{"rendered":"Lesedauer<\/span> 5<\/span> Minuten<\/span><\/span>\n

Do you know the game of chess? And would you like to earn more money with money? We explain how chess, the compound interest effect and your pension provision are connected. Read on and learn how you can make more of your money with little effort: how you can make money work for you. <\/p>\n\n\n\n

The difference between linear and exponential growth<\/h2><\/div>\n\n

4 plus 4 equals 8, and another 4 equals 12, which is linear. 4 times 4 equals 16, and multiplied by 4 again equals 64. This is exponential, exponentiated, a multiple. <\/p>\n\n

Let’s take a look at the effect of exponential growth with an anecdote from the Arab world. Legend has it that an advisor to an Indian ruler invented the game of chess. Although the king plays a central role in chess, he is lost without his pawns and officers. To thank him for his wisdom and entertainment, the ruler granted his advisor a free wish. Sissa bin Dahir<\/a> asked for grains of wheat, twice as many in each field as in the previous one. The ruler granted him this wish. After a few days of calculating, the grain master realized that he could not keep the ruler’s reckless promise. The amount owed was more than a thousand times the annual wheat production of our time. <\/p>\n\n

The anecdote shows very clearly how large the numbers become through exponential multiplication. Einstein was therefore also credited with the quote that compound interest is the greatest mathematical invention of human thought. Even if it is now considered proven that this is only an attribution after his death, this does not change its powerful leverage effect. <\/p>\n\n

What is compound interest and the compound interest effect?<\/h2><\/div>\n\n

The compound interest effect is the basis for making money work for you. But how exactly does it work? Interest is an amount calculated as a percentage that increases the interest-bearing sum (assets and debts) after a certain term. As assets or debts increase as a result of interest, the percentage interest refers to a larger <\/em>sum in the next <\/em>interest calculation. Interest credited or charged therefore increases annually. Compound interest therefore arises from the fact that you receive<\/span> interest on the previous year’s interest<\/b> in the following year if you directly reinvest the interest received. <\/p>\n\n

The compound interest effect then leads to the assets doubling after a certain period of time and later growing exponentially – due to the interest payments. Incidentally, although the compound interest effect is called this, it does not only apply to fixed-interest investments. Income from shares (i.e. dividends) also generates additional income in subsequent years if you reinvest it in shares immediately after distribution. Money makes money.<\/b><\/p>\n\n

Caution: the compound interest effect plays against you with debts. Debt becomes more debt<\/b> if you do not make any repayments (current interest payments and\/or repayments).<\/p>\n\n

What influences compound interest?<\/h2><\/div>\n\n

The amount of compound interest depends on the following factors. Firstly, the initial assets that you invest at the beginning or draw down as a loan. Secondly, the amount and frequency of further deposits (so-called savings installments). Thirdly, the investment horizon, i.e. how long you invest your initial assets and savings installments. And fourthly, the interest rate (the return) that you receive or pay as interest on a loan. Let’s take a closer look at this. <\/p>\n\n

How the compound interest effect works in practice<\/h2><\/div>\n\n

The following three principles therefore apply to the compound interest effect, each separately and all together. <\/p>\n\n

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  • Principle 1: The greater your <\/span>initial assets<\/b>,<\/span> the more your wealth will grow.<\/li>\n\n\n\n
  • Principle 2: The longer<\/b> you invest<\/span>, the more your assets will grow.<\/li>\n\n\n\n
  • Principle 3: The higher the <\/span>interest rate<\/b>, <\/span> the more your assets grow. <\/li>\n<\/ul>\n\n