Compound Interest

Discover what compound interest is and why it is the key to growing wealth in index funds. Index Balance projects it automatically across your portfolio.

Definition

Compound interest is the process by which returns generated by an investment are added to the initial capital and, in turn, generate new returns in subsequent periods. In other words, you earn returns on your returns. Albert Einstein reportedly described it as "the eighth wonder of the world": those who understand it, earn it; those who don't, pay it.

For the index fund investor, compound interest is the primary driver of long-term wealth. The earlier you start investing and the longer you stay invested, the greater the multiplier effect. A 5-year difference in the start date can mean more than 40% difference in final wealth over 30 years. This is why consistency and patience are the most profitable virtues of the passive investor.

Index Balance lets you visualise your portfolio's projected growth curve and see how invested capital and returns diverge over time. Try it free at indexbalance.com.

Practical example

You invest €10,000 at a 7% annual return. Without reinvestment (simple interest), after 30 years you would have €31,000. With compound interest (reinvesting returns), you would have €76,123 — more than double. The difference of €45,123 is not money you deposited: it is the pure fruit of compounding. Index Balance calculates this automatically every time you update your portfolio.