The compound interest effect à la Oppenheimer

Currently, the captivating movie «Oppenheimer» is celebrating great success in cinemas and tells the moving story behind the invention of the atomic bomb. Yet, away from the screen, there is an astonishing connection between this historical event and your wealth building. This connection is called the compound interest effect. Just like the exponential chain reaction in an atomic bomb explosion, the compound interest effect can multiply your money. In this blog post, we reveal what compound interest is all about:

What is the compound interest effect?

The compound interest effect is a phenomenon that occurs when you earn interest on your interest. This means that you not only earn money by investing your capital, but also by reinvesting your previous gains. As a result, your wealth grows faster the longer you invest it.

So, you can imagine the compound interest effect like an atomic bomb. When a nucleus is split, neutrons are released that can split other nuclei. This triggers a chain reaction that produces more and more energy. Similarly, with the compound interest effect: when you receive interest, your capital increases, which in turn generates more interest. This leads to exponential growth of your wealth.

How does the compound interest effect work?

The compound interest effect depends on three factors: the initial capital, the interest rate, and the investment duration. The higher these factors are, the stronger the compound interest effect. To calculate the compound interest effect, you can use the following formula:

Final capital = Initial capital × (1+Interest rate) ^{Investment duration}

K_n = K₀ × (1 + p/100) ⁿ  

For example: If you invest 10,000 CHF (K₀) at an annual interest rate of 5% (p), after 10 years (n) you will have 16,288 CHF(K_n) in your account. If you wait 20 years, you will already have 26,533 CHF. And if you wait 30 years, you will have 43,219 CHF! That is more than four times your initial capital!

How can you use the compound interest effect?

As you can see, the compound interest effect can make a huge difference when it comes to your financial future. Therefore, you should start saving and investing as early as possible to fully utilize the compound interest effect. You should also look for investment options that offer a high and consistent interest rate, such as stocks or ETFs.

The compound interest effect is one of the most important lessons you can learn in the world of finance. It can help you achieve your investment goals faster and more easily. It can also show you how powerful time is when it comes to your money. As the famous physicist Albert Einstein is said to have remarked, “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn't, pays it.”