2 months ago

Compound interest - your new best friend

Most people would likely imagine a super hero duo for pension planning like this: Two stocky middle-aged figures in "reasonable footwear", whose superpower it is, to use one hand to put an entire room of people into paralysis out of boredom, whilst eating a liverwurst sandwich with the other.

But that would be far from it! Granted, the two are rather inconspicuous, but rather out of humilty than for style reasons. Completely without spandex suits they are taking care of protection your pension against the evil antagonist inflation and are using their powers to help it grow continuously.

On top of it all, they have the best names since Starsky & Hutch:

Compound & Interest

There is a simple explanation for how they do it: If you deposit money into your bank accounts, that is basically nothing else than you lending it to the bank. It is then used, for example, to grant credit to other customers or to reinvest it. You might not realize this, but you are being paid for it with interest.

Example 1:

If you invest €100 at a yearly interest rate of 3%, you will receive €3 at the end of the year, which makes for a total of €103.

So far, so good. So you know about interest, but what about compound interest? In the family tree you could say that compound interest is the interest's child. And its grandchild. And grand-grandchild. And grand-grand-grand... you get the idea.

Compound interest is nothing else than the fact, that you are earning interest on the interest that you already got in the past. Let's stick with our example:

After the first year you already made €103 out of the inital €100. That means, that in the following year, the 3% annual interest are not only being applied to the €100, but also to the €3 of interest you already earned. Interest on interest = Compound interest.

Makes sense, right?

It becomes even clearer in our compound interest table:

You see: Every year the interest you receive grows, without you putting in more money or the interest rate increasing. All thanks to the compound interest effect. So if you hear someone say "Let your money work for you.", from now on you'll know what they are talking about.

A penny saved is a penny earned, so let's save Dollar$

What we have calculated in the table with small amounts, can make a significantly larger difference when saving larger amounts for longer amounts of time, like - let's say - one does with one's pension.

So the earlier you start and the more you pay in, the more you profit from compound interest.

To illustrate this, we calculated another example for you. For this, we compare how much money you receive at retirement (i.e. at 65), if you invest the same amount of €5.000 at 3% yearly interest at the ages of 25, 35 and 45.

Example 2:

So we can very clearly answer the question of when you should start saving for your future: Now. Today. Immediately.  

To make that as easy as possible for you, we at Vantik have created a pension product with which you can start saving for your future from anywhere in only 11 minutes. Simply sign up and start saving from €1 (the more you save, the higher the compound interest effect).