Compound interest explained: why starting earlier matters so much

Compound interest means earning returns not only on what you put in, but also on the returns you've already earned. In the early years it's barely noticeable. Over decades it becomes the biggest part of the result.

The examples are illustrative, before taxes and fees, and assume a steady return that is never guaranteed in reality. They are not financial advice.

An example with €200 a month

Say you put away €200 every month and earn an average of 5% a year:

• After 10 years: you'd have contributed €24,000 and have about €31,000.
• After 20 years: you'd have contributed €48,000 and have about €82,200.
• After 30 years: you'd have contributed €72,000 and have about €166,500.

Look at that last number: more than half of it didn't come out of your pocket. And the growth between year 20 and year 30 is larger than everything built in the first 20 years.

Why starting earlier matters so much

Under the same assumptions, someone who starts at 25 and contributes until 65 would end up with roughly €305,000. Someone who starts at 35 would end up with about €166,500. Ten extra years nearly double the result, even though total contributions are only a third higher.

That's why starting small now usually beats waiting until you can afford to invest a lot.

The rule of 72

A handy shortcut: divide 72 by the annual return to estimate how many years it takes for money to double. At 6%, about 12 years. At 3%, about 24.

Compounding works against you too

Fees compound just like returns. With €200 a month for 30 years in a market returning 6%, paying 0.2% a year in costs would leave you with about €193,000; paying 1.5% would leave about €152,000. That's over €40,000 lost to a detail many people never check.

Debt works the same way: credit card interest compounds on itself. Clearing expensive debt usually comes before investing.

Applying it to your own situation

The variable you control most isn't the return; it's how much you contribute and for how long. Knowing what part of your income is genuinely free each month is the first step. In MonVault you can see your real margin, set a savings goal and watch your net worth evolve over the years.