The calculator illustrates the effect of compound interest on your savings. But what does compound interest mean?
To put it simply, compound interest is interest earned on previously earned interest. When it comes to compounding, time is on your side – the earlier you start investing or the longer you let your money grow, the more time you have to earn compound interest. As the principal amount grows every year, you earn interest not only on your original investment but also on the return on that investment.
How does compound interest work?
If you invest 1,000 euros with a 5% rate of return, you will see 50 euros added to your original investment of 1,000 euros after the first year. This brings the total value of your investment to 1,050 euros. In the second year, you will get a higher return whether you invest more or not.
Should the rate of return remain at 5%, your new principal amount of 1,050 euros would grow by another 5%, or 52.50 euros, giving you a total of 1,102.50 euros after the second year. You will therefore have earned interest on your principal amount and also on the interest you earned in year one.
Regular saving boosts the effect of compound interest
The most savvy savers do not just let their original investment grow but contribute to it on a regular basis. Through regular saving, your principal amount grows constantly. This also means that you will earn more interest and get to enjoy the snowball effect of compounding.
You can enter four values to the calculator:
- Initial amount: This could be either a single lump sum or how much you have currently saved. If you don’t want to invest a lump sum and you don’t have any savings, enter zero in this field.
- Saving period: The number of years you plan to save for.
- Annual rate of return: How much you expect your savings to grow each year.
- Monthly saving amount: The amount you plan to invest through regular monthly saving.
You can enter all values manually or move the slider. The total amount below the calculator shows you how much your savings could grow during the time period you have selected. You can play around and see how changing things affects the total.
The saving period tells you how long you should be prepared to save to reach your goal. If you have a specific savings goal in mind and you have selected an annual rate of return, you can try entering different time periods to see how they affect the total. This way you can work out how long it will take you to reach your goal.
By changing your monthly saving amount, you can see how much you need to save each month to hit your target.
When it comes to regular saving, the earlier you start, the better the results. The effect of compounding means that the total return from your monthly savings will grow year by year. The interest you earn on your savings is added to the principal. As well as earning interest on the savings, you also earn interest on the interest itself.
Please note that this calculator provides an illustration only. It does not take into account any fees, charges and other costs payable to the investment fund which will affect the performance of your investment.