How does compound interest really work?

Ever heard the phrase “Let your money work for you”? That’s not just a catchy line — it’s exactly what compound interest does. It’s the little financial engine that can turn modest savings into serious wealth if you give it time. Even Albert Einstein (yes, the genius with the wild hair) reportedly called it the “eighth wonder of the world.”

The magic trick behind compound interest

Think of compound interest like a snowball rolling down a hill. At first it’s small, but with every turn it picks up more snow — and before long, it’s a giant ball racing downhill.

In financial terms:

• You earn interest on your savings.
  
• That interest is added to your balance.
  
• Next time, you earn interest not just on your savings, but also on the interest you already earned.
  

That’s compound interest: your money earning interest on interest.

A practical example in CHF

Let’s say you put CHF 10,000 into an account with 5% annual interest.

• Year 1: You earn CHF 500, balance = CHF 10,500.
  
• Year 2: Interest is calculated on CHF 10,500 → you earn CHF 525, balance = CHF 11,025.
  
• Year 10: About CHF 16,300.
  
• Year 20: Roughly CHF 26,500.
  
• Year 40: Nearly CHF 70,000.
  

Same money, same rate — but the growth speeds up dramatically because every year you’re earning interest on a bigger pot.

💡 Pro tip: With simple interest (if you withdrew CHF 500 every year), you’d only have CHF 15,000 after 10 years. With compound interest, you’re already at CHF 16,300 — and the gap keeps getting wider.

Where compound interest shows up in real life

Savings accounts

Safe, simple, familiar. But with today’s low Swiss interest rates (0.5% or less), your money will grow very slowly.

There’s a quick way to estimate growth: the Rule of 72.

• Divide 72 by the annual interest rate = years it takes to double your money.
  
• At 0.4% interest → 72 ÷ 0.4 = 180 years to double.
  
• At 4% interest → just 18 years to double.
  

So yes, savings accounts offer compound interest — but unless rates rise, they’re more “slow and steady” than “wealth builder.”

Pillar 3a (the Swiss retirement saver’s best friend)

The 3a pillar is where compound interest really flexes its muscles. Because funds usually stay invested for decades, even small annual contributions can snowball into big retirement pots.

• Start early = the effect multiplies.
  
• Example: Paul starts contributing at 25, Leo at 40. Both use the same 3% return. At retirement, Paul has over double Leo’s balance — simply because he gave compounding 15 more years to work.
  

💡 Timing matters: Many Swiss savers pay into 3a at the end of the year. But if you contribute in January, you give your money an extra year of growth. Over decades, that simple timing choice can mean tens of thousands more in your account.

💡 Investment choice matters too:

• Classic 3a bank accounts = 0.5–1.5% interest.
  
• 3a funds (stocks/ETFs) = 3–5% average returns.
  

Over 30–40 years, that difference isn’t small — it’s life-changing.

Investments (stocks, ETFs, funds)

This is compound interest on caffeine. Higher returns and automatic reinvestment (dividends going back into the fund) mean your wealth can grow surprisingly fast.

Example: You invest CHF 1,000 per month in an equity fund.

• Total invested after 25 years = CHF 300,000.
  
• With compounding, your wealth = nearly CHF 600,000.
  
• That extra CHF 300,000 came from returns earning returns.
  

⚠️ Watch out for fees. A 1% annual fee might not sound like much, but over decades it can eat away tens of thousands of francs. Always check costs, because every franc lost to fees is a franc not compounding for you.

Common mistakes people make with compound interest

1. Withdrawing your interest
   – If you take out your returns every year, you kill the snowball effect.
   
2. Starting too late
   – Time is your best friend in compounding. Delay = smaller snowball.
   
3. Leaving money idle
   – A 0% account or cash under the mattress = guaranteed loss of buying power due to inflation.
   
4. Ignoring fees
   – High-cost products slow down compounding. Over decades, 1% saved in fees can mean years gained in growth.
   
5. Expecting overnight results
   – Compounding looks boring at first — small gains. Then, after years, the curve shoots upward. Patience is the secret ingredient.
   

Play with the numbers yourself

Sure, there’s a formula for compound interest:

Future Value = Start Capital × (1 + Rate)Years

But why do math when you can see it instantly?

👉 Try our free Compound Interest Calculator and watch how your money snowballs over time. Change the inputs, test scenarios, and see the power of compounding in CHF terms.

Final thought

Compound interest isn’t magic — but it’s as close as finance gets. The sooner you start, the more powerful it becomes.

• Start small, start early.
  
• Reinvest your returns.
  
• Keep costs low.
  
• Let time do the heavy lifting.
  

Or, to put it in Swiss style: “Kleinvieh macht auch Mist” — even small amounts pile up when compound interest is at work.

👉 Give our Zinseszinsrechner a spin today and see how your own savings could grow.