Calculating Compound Interest: Formula, Examples, and Tips

Compound interest is the quiet engine of your long-term wealth building. It ensures that your money earns interest not only on your original deposit, but also on the interest that has already been credited.
This guide explains the principle clearly and simply, walks you through the calculation step by step, and provides examples and tips specifically for Switzerland.

Quick overview

Compound interest means that interest is added to your balance, and this larger balance then earns further interest.

Time and return are the two biggest drivers of growth.

In Switzerland, tax-advantaged Pillar 3a contributions and low-cost investing can significantly increase the power of compound interest.

Pro Tip: The earlier you start investing, the stronger the effect of compounding. Even small sums grow meaningfully when given enough time.

What is compound interest?

When credited interest is reinvested, it begins to earn interest itself. This effect strengthens over time.
With simple interest, you only earn interest on your initial amount. With compound interest, you earn interest on both your starting amount and on the previously earned interest.

A short example

Start with CHF 1,000 at 5 percent per year.

• Simple interest after 10 years: CHF 1,000 plus CHF 50 × 10 = CHF 1,500.
• Compound interest after 10 years: CHF 1,000 × (1.05)¹⁰ ≈ CHF 1,629.

The extra CHF 129 arises because the interest itself is working for you.

Pro Tip: Think of compound interest as a snowball rolling downhill—it grows bigger and faster the longer it rolls.

The formula in simple words

A = P × (1 + r/n)^(n × t)

• A is the final amount
• P is the starting amount
• r is the annual interest rate (as a decimal)
• n is the number of times interest is credited per year
• t is the time in years

If interest is credited once per year, set n = 1, which gives A = P × (1 + r)^t.
If credited monthly, set n = 12.

With regular monthly contributions, use the future value formula for a series of payments:
A = P × (1 + r/n)^(n × t) + PMT × [((1 + r/n)^(n × t) − 1) / (r/n)]

Here PMT is your monthly contribution.

Pro Tip: Use a financial calculator or the Vita Finance Compound Interest Calculator to test different interest rates and compounding frequencies—you’ll see how faster compounding boosts returns.

The Rule of 72

Approximate doubling time = 72 divided by the interest rate (in percent).
At 6 percent, your money doubles in about 12 years. At 1 percent, it takes around 72 years.

Pro Tip: Keep this rule handy—it’s a quick way to estimate how long it will take to double your savings at any given return rate.

Swiss context

Pillar 3a: Contributions are tax-deductible, and the capital grows tax-advantaged until withdrawal. Over the long term, this benefit amplifies the effect of compound interest.

Savings interest and returns: Traditional savings accounts often yield very low interest. A broadly diversified investment with a higher expected return can grow much more over decades, depending on your time horizon and risk profile.

Costs: Ongoing fees reduce your net return. Lower costs mean more of your return continues to earn compound interest.

Pro Tip: Focus on your net return, not just the advertised rate. Taxes and fees can quietly erode the benefits of compounding if not managed well.

Calculation examples

Example 1: One-time deposit of CHF 10,000

Here’s how a single deposit develops depending on the effective annual interest rate (with annual compounding).

Rounded CHF values, starting amount CHF 10,000.
Important: Differences are small at first, but grow dramatically over time. Time multiplies the effect of the interest rate.

Pro Tip: When comparing savings or investment products, always project 10+ years ahead—small rate differences compound into large gaps over time.

Example 2: Saving CHF 500 per month

Comparison between a low-interest path and a higher-return path. Monthly compounding assumed, starting amount CHF 0.

Rounded CHF values based on the payment series formula. Real returns fluctuate.
Important: Regular contributions combined with higher returns lead to large differences over time.

Pro Tip: Consistency beats timing. Regular monthly saving, even in volatile markets, compounds powerfully over the years.

Example 3: Pillar 3a over 40 years

Assume annual contributions of CHF 7,000 for 40 years.

For illustration only. Actual returns depend on market conditions and products.
Important: A large share of total growth occurs in the last ten years. Staying invested is key.

Pro Tip: Don’t panic during market dips—the biggest compounding happens toward the end of long-term investments.

How to calculate it yourself

Case: One-time deposit of CHF 10,000 for 10 years at 5.0% per year, compounded monthly, no monthly contributions.
Monthly interest r/n = 0.05 ÷ 12 = 0.004167.
Number of periods n × t = 12 × 10 = 120.

Apply the formula:
A = 10,000 × (1 + 0.004167)^120 ≈ CHF 16,470.

With monthly savings: add CHF 500 per month at the same rate.
A = 10,000 × (1.004167)^120 + 500 × [((1.004167)^120 − 1) ÷ 0.004167] ≈ CHF 86,000.

You can easily check your own numbers using a compound interest calculator—for example, the Vita Finance Compound Interest Calculator.

Pro Tip: Save your own calculator results and revisit them annually—adjusting your plan slightly each year can dramatically improve your long-term outcome.

Tips for boosting compound interest in Switzerland

• Start now, even small. Time in the market matters more than perfect timing. A small start today is better than a big start later.
• Automate. Standing orders into your Pillar 3a or investment account help you invest consistently and for the long term.
• Reinvest everything. Leave interest and dividends in the account so they can generate further returns.
• Watch your costs. Choose low-fee funds and providers. One percent in fees can cost you a lot over decades.
• Match risk to your time horizon. Longer horizons can handle more fluctuation. For short-term goals, choose safer options.
• Use tax advantages. Pillar 3a deductions increase the amount that keeps compounding for you.

Pro Tip: Automate, reinvest, and minimize costs—these three habits are the foundation of exponential wealth growth.

Common mistakes to avoid

• Starting too late. Lost time is hard to make up.
• Chasing exaggerated return promises without understanding the risk. It’s better to diversify broadly and stay consistent.
• Leaving money for years in very low-interest accounts. Purchasing power can fall if inflation is higher than interest.
• Ignoring fees and taxes. Even small frictions work against you.
• Stopping contributions during weak markets. Staying the course is often rewarded over the long run.

Pro Tip: Avoid emotional investing. Staying disciplined and consistent pays off more than reacting to short-term market noise.

Try it with your own numbers

Use the Vita Finance Compound Interest Calculator to test deposits, monthly contributions, interest rates, and time periods.
Calculate both conservative and optimistic cases to set realistic goals.

Pro Tip: Make it a habit to review your compounding plan each year—small adjustments now create big results later.

This text is for general information purposes only and does not constitute financial advice. Please assess your personal situation or seek professional advice if needed.