Compound interest (Zinseszins)
Compound interest (Zinseszins) is interest calculated on the original principal plus all interest already earned in prior periods. Each period's interest joins the base for the next period's calculation, producing growth that accelerates over time instead of adding a fixed amount each period — exponential, and back-loaded toward the later years.
Why it matters
Compounding is symmetric: the same mechanism that grows a savings balance or an investment position also grows a debt balance. A savings account or an ETF (Exchange Traded Fund) position that reinvests its returns accumulates interest-on-interest in the saver's favor. A Kreditkarte (credit card) balance or Dispokredit (overdraft) carried forward accrues interest on interest already added if it goes unpaid — revolving debt (a balance re-charged and carried into the next period) compounds through the identical mechanism, in the lender's favor.
Because most of the total growth from compounding happens in later periods rather than earlier ones, the length of time money stays invested — or stays owed — has an outsized effect on the final balance. This back-loading is a mathematical property of exponential curves, not a claim about any specific rate: the longer the horizon, the larger the share of growth concentrated near the end of it.
Worked examples
1. Compound versus simple, two years. €1,000 at an illustrative 5% per year, compounded annually: year one adds 5% x €1,000 = €50, bringing the balance to €1,050. Year two adds 5% x €1,050 = €52.50, because interest now accrues on €1,050, not €1,000 — giving a final balance of €1,102.50. Simple interest on the same €1,000 at 5% pays €50 in each of the two years regardless of the growing balance, for a total of €1,100. The €2.50 difference is small over two years; the same mechanism compounds that gap over decades.
2. Long horizon — back-loaded growth. €10,000 at an illustrative 5% per year, compounded annually, over 30 years:
| Year | Balance | Growth in that decade |
|---|---|---|
| 0 | €10,000.00 | — |
| 10 | €16,288.95 | €6,288.95 |
| 20 | €26,532.98 | €10,244.03 |
| 30 | €43,219.42 | €16,686.44 |
The final decade alone (€16,686.44) contributes more growth than the first two decades combined (€16,532.98). The rate never changes across the 30 years — only the base it applies to grows, which is what produces the back-loading.
Don't confuse with
Simple interest calculates interest on the original principal only, every period, regardless of how much interest has already accrued. It grows in a straight line: the same euro amount is added each period, so a chart of the balance over time is a straight line rather than a curve. Compound interest recalculates the base each period to include prior interest, producing a curve that bends upward — flat at first, then increasingly steep.
Check yourself
€1,000 earns an illustrative 5% per year, compounded annually. What is the balance after 2 years?
€10,000 grows at a constant illustrative 5% per year, compounded annually, for 30 years. In which 10-year segment does the balance gain the most euros?
Which statement correctly distinguishes compound interest from simple interest?
A Kreditkarte (credit card) balance is not paid off and keeps accruing interest on interest already added. How does this compare to compounding in a savings account?