Compound interest: Why starting early can build wealth

Compound interest means that interest is calculated not only on the money saved but also on the interest already earned. The longer income remains invested, the wider the gap compared with interest that is paid only on the initial amount. This only applies as long as the income remains invested, and an investment can also lose value.

Compound interest: interest on interest

An example makes it tangible. At an interest rate of 4% per year, CHF 1,000 earns CHF 40 in the first year. In the second year, interest is calculated on CHF 1,040 and amounts to CHF 41.60. The increase therefore grows a little each year.

The formula is: final amount = initial amount × (1 + r)^n. Here, r stands for the interest rate per year (4% is 0.04) and n for the number of years. The symbol ^ means «to the power of»: the factor 1.04 is multiplied by itself n times.

After ten years, the difference is small. After 40 years, it is over 80%, measured against the amount without compound interest. Growth that acts on an amount that has already grown rises ever more steeply. The technical term for this is exponential growth. The last column, by contrast, shows steady growth: the same amount every year.

Worked example in CHF: the difference ten years make

The table uses a single lump sum. The next example adds regular contributions: CHF 1,000 at the start and then CHF 100 per month, paid at the end of each month. The assumed return is 4% per year, with interest compounded monthly. On this basis, one franc becomes 1.04 francs in twelve months.

After 30 years, the example gives around CHF 71,770 from CHF 37,000 in contributions. The remaining CHF 34,770 or so is income from interest and compound interest. If the same savings plan starts ten years later, 20 years remain. The result is then around CHF 38,575 from CHF 25,000 in contributions. Starting early produces around CHF 33,200 more, with CHF 12,000 more in contributions.

What stands out is when the amount builds up. After the first ten years, the example shows only around CHF 16,150, and after 20 years around CHF 38,575. The last ten years add around CHF 33,200. That is around 46% of the final value, although they make up only a third of the time.

What will CHF 100 today be worth in ten years?

Money today is worth more than the same sum later, because it can be invested and earn interest. This is called the time value of money. Conversely, a future amount can be converted back to today's value by dividing it by (1 + r)^n. This calculation is called discounting, and the result is the present value.

Interest has to be set against inflation. In Switzerland, the Federal Statistical Office (FSO) measures it with the Swiss Consumer Price Index (CPI). The annual average for 2025 was +0.2%, and in October 2026 it was +1.5% compared with the same month a year earlier. How return and inflation combine into a real return is explained in the article on how much of a return is left after inflation.

In nominal terms, the amount grows. In real terms, the increase is smaller. Without interest, money loses purchasing power as soon as prices rise.

Average return: a look back, not a forecast

For Switzerland, the study by Pictet Wealth Management shows what return was achieved over a long period. Swiss equities returned an average of 6.8% per year from 1900 to 2025, in nominal terms (data as of 31 December 2025). Over the same period, inflation averaged 2.1% per year. Past performance is not a reliable indicator of future results.

Pictet also shows what this means in francs. CHF 1,000 invested in 1900 would have grown to CHF 3.97 million by the end of 2025 before costs, with income reinvested. With annual costs of 50 basis points, the figure is around CHF 2 million. A basis point is one hundredth of a percentage point, so 50 basis points are 0.5 percentage points. Even costs this small reduce the final amount here by almost half.

The period determines the figure. From 2009 to 2025, the average was 8.5% per year. And since 1900, there have been 37 negative years. The figures apply to the Swiss equity market and cannot be transferred to other markets or to a globally diversified portfolio. The 4% in the calculator, on the other hand, is a freely chosen assumption and not a historical value. When equities failed to deliver their excess return is described in the article on the risk premium with figures from Switzerland.

Regular saving as a habit

Starting early often means setting aside small amounts regularly. A study by Thaler and Benartzi (2004) shows that automatic saving can change behaviour. At a US company, participants committed in advance to saving part of their future pay rises. Their average savings rate rose from 3.5% to 13.6% within 40 months. The study concerned saving out of pay rises, not the point at which investing begins.

A brief look at retirement provision

The Swiss pension system is based on three pillars. The first is state provision through Old-Age and Survivors' Insurance (AHV) and Disability Insurance (IV). It is financed on a pay-as-you-go basis: current contributions pay current pensions. The second is occupational pension provision through pension funds. Here, the money is saved up, which is known as the funded system. The third is private saving.

Pillar 3a supplements the first two. The money is locked in until five years before the reference age (the standard retirement age), with exceptions. How the system is structured is explained in the article on retirement provision in Switzerland. Different rules may apply to individual circumstances. As of: information from the Federal Social Insurance Office (FSIO), accessed on 10 November 2026.

Risks and limitations

• Losses: An investment can lose value, up to and including a total loss. If the value falls, the amount on which future interest is earned becomes smaller. Compound interest then works in the other direction.
• An average is not a guarantee: An average return spreads the result evenly across the years. Individual years can be negative. For Swiss equities, there have been 37 such years since 1900.
• Period: The average return varies depending on the period, as the 6.8% since 1900 and the 8.5% from 2009 to 2025 show.
• Costs and taxes: The calculator includes neither. Costs can reduce the final amount sharply, as the Pictet example shows. Tax treatment differs from country to country, and individual circumstances may vary.
• Inflation: It reduces the purchasing power of the final amount. A return below inflation means a loss in real terms.
• Interrupted investment: The effect only works as long as the income remains invested. If money is withdrawn or the investment is sold earlier, the later effect is smaller.
• Debt: As a principle of calculation, the same formula also applies to debt, except that it is the amount owed that grows.
• Assumption, not forecast: The worked examples use freely chosen, constant returns. Actual outcomes fluctuate.

Conclusion

Compound interest means interest on interest, and time amplifies the effect. In the example, almost half of the final value is generated in the last ten of 30 years, and starting ten years earlier gives a considerably higher result under the stated assumptions. Inflation, costs and taxes reduce the result, and returns fluctuate. The average return for Swiss equities is a look back and not an expectation, and losses are possible.