{"id":38262,"date":"2024-11-12T11:02:20","date_gmt":"2024-11-12T10:02:20","guid":{"rendered":"https:\/\/fidulex.ch\/?p=38262"},"modified":"2024-11-12T11:12:16","modified_gmt":"2024-11-12T10:12:16","slug":"compound-interest-how-it-works","status":"publish","type":"post","link":"https:\/\/fidulex.ch\/en\/compound-interest-how-it-works\/","title":{"rendered":"Compound interest: How does it work?"},"content":{"rendered":"
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What are compound interests?<\/h2>\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t
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Compound interest is the sum of interest<\/strong> earned on an initial capital as well as on the interest accumulated over time.<\/p>

Unlike simple interest<\/strong>, where only the interest on the initial capital is calculated, compound interest regularly \"capitalizes\" the already accumulated<\/strong> interest, thus allowing the capital to grow in an exponential<\/strong> manner.<\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t

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How does compound interests work?<\/h2>\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t
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To illustrate this concept, let's take a simple example: suppose you invest CHF 10,000<\/strong> in life insurance at an annual interest rate of 5 %<\/strong>. If the interest is compounded annually, at the end of the first year you would have :<\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t

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  • \n\t\t\t\t\t\t\t\t\t\t\t\n\t\t\t\t\t\t\t<\/i>\t\t\t\t\t\t<\/span>\n\t\t\t\t\t\t\t\t\t\tInitial capital :<\/b> CHF 10,000<\/span>\n\t\t\t\t\t\t\t\t\t<\/li>\n\t\t\t\t\t\t\t\t
  • \n\t\t\t\t\t\t\t\t\t\t\t\n\t\t\t\t\t\t\t<\/i>\t\t\t\t\t\t<\/span>\n\t\t\t\t\t\t\t\t\t\tInterest for the 1st year :<\/b> 10,000 CHF \u00d7 5 % = 500 CHF<\/span>\n\t\t\t\t\t\t\t\t\t<\/li>\n\t\t\t\t\t\t\t\t
  • \n\t\t\t\t\t\t\t\t\t\t\t\n\t\t\t\t\t\t\t<\/i>\t\t\t\t\t\t<\/span>\n\t\t\t\t\t\t\t\t\t\tNew capital :<\/b> CHF 10,500<\/span>\n\t\t\t\t\t\t\t\t\t<\/li>\n\t\t\t\t\t\t<\/ul>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t
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    To calculate compound interest over 10 years, while maintaining an interest rate of 5%, we use the following formula:<\/p>

    C\u2099 = C\u2080(1 + t)\u207f<\/strong>, where<\/p>

    C\u2099\u200b<\/span><\/span><\/span><\/span><\/span><\/span><\/span><\/span><\/strong> : Future value of capital after \"<\/span>n<\/span><\/span><\/span><\/span> \" periods.<\/p>

    C\u2080\u200b<\/span><\/span><\/span><\/span><\/span><\/span><\/span><\/span><\/strong> : The initial capital or starting amount.<\/p>

    t<\/span><\/span><\/strong> : The interest rate per period (expressed as a decimal, e.g. 5 % = 0.05).<\/p>

    n <\/strong>: The number of periods during which capital is invested or capitalized.<\/p>

    For the second year, interest is calculated on the CHF 10,500<\/strong>, and not only on the initial capital:<\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t

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    • \n\t\t\t\t\t\t\t\t\t\t\t\n\t\t\t\t\t\t\t<\/i>\t\t\t\t\t\t<\/span>\n\t\t\t\t\t\t\t\t\t\tCapital after 2 years : <\/b> 10,000 CHF \u00d7 ( 1 + 5 %)^2 = 11,025 CHF<\/span>\n\t\t\t\t\t\t\t\t\t<\/li>\n\t\t\t\t\t\t<\/ul>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t
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      The effect of compounding becomes increasingly noticeable as the years go by, significantly increasing the total amount accumulated over time.<\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t

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      • \n\t\t\t\t\t\t\t\t\t\t\t\n\t\t\t\t\t\t\t<\/i>\t\t\t\t\t\t<\/span>\n\t\t\t\t\t\t\t\t\t\tCapital after 10 years :<\/b> CHF 10,000 x (1 + 5%)^10 = CHF 16,288.95<\/span>\n\t\t\t\t\t\t\t\t\t<\/li>\n\t\t\t\t\t\t<\/ul>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t
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        How can I benefit from compound interests?<\/h2>\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t
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        Traditional savings accounts offer a high level of security and liquidity, but in return offer very low interest rates.<\/p>

        Consequently, compound financial products such as investment funds, retirement savings plans (like the 3rd pillar), and even stock market investments often offer higher returns<\/strong> thanks to the effect of compound interest, although they are also more risky.<\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t

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        The timing of compound interest<\/h2>\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t
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        Time amplifies their impact. An investment of 10,000 CHF at an annual interest rate of 5% over 10 years grows to approximately 16,289 CHF. However, if the investment is maintained for 20 years<\/strong>, it reaches nearly 26,533 CHF, thus demonstrating the power of the multiplier effect<\/strong> in the long term.<\/p>

        Regular investments can also be very effective. For example, investing 5,000 CHF<\/strong> each year for 20 years<\/strong> at a 5%<\/strong> rate could result in a final capital far exceeding the initial contributions, thanks to compound growth<\/strong>.<\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<\/div>","protected":false},"excerpt":{"rendered":"

        Compound interest is a fundamental concept in finance. It has a multiplier effect on initial capital. For Swiss investors looking to maximize their savings, understanding and exploiting compound interest can mean the difference between modest gains and substantial long-term growth.<\/p>","protected":false},"author":1,"featured_media":38264,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"content-type":"","footnotes":""},"categories":[58],"tags":[],"class_list":["post-38262","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-finance-investissement"],"_links":{"self":[{"href":"https:\/\/fidulex.ch\/en\/wp-json\/wp\/v2\/posts\/38262","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/fidulex.ch\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/fidulex.ch\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/fidulex.ch\/en\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/fidulex.ch\/en\/wp-json\/wp\/v2\/comments?post=38262"}],"version-history":[{"count":7,"href":"https:\/\/fidulex.ch\/en\/wp-json\/wp\/v2\/posts\/38262\/revisions"}],"predecessor-version":[{"id":38270,"href":"https:\/\/fidulex.ch\/en\/wp-json\/wp\/v2\/posts\/38262\/revisions\/38270"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/fidulex.ch\/en\/wp-json\/wp\/v2\/media\/38264"}],"wp:attachment":[{"href":"https:\/\/fidulex.ch\/en\/wp-json\/wp\/v2\/media?parent=38262"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/fidulex.ch\/en\/wp-json\/wp\/v2\/categories?post=38262"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/fidulex.ch\/en\/wp-json\/wp\/v2\/tags?post=38262"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}