Compound interest calculator

Three figures, and only one is true

Search for «compound interest calculator» and you will find thirty tools that all return the same number: the gross capital, before fees, in the money of the final year. It is the most flattering of the three figures one could give, and the only one that matches nothing you will ever receive.

Take an ordinary case: €10,000 invested, €200 a month, twenty years, a 5 % return. The universal answer is €108,025. It assumes no contract takes anything and prices never rise.

Add what an average life-insurance contract really takes — 2 % on every payment, 0.85 % a year on the balance — and the capital falls to €94,354. Fees took €13,671, or 12.7 % of what you would have had without them. You did not pay €13,671 in fees: you paid €9,094, and the rest is what those fees would have earned had they stayed invested. That is the mechanism the fees calculator details across three contracts.

Finally remove inflation, at 2 % — the central bank's target, so the low assumption. The €94,354 buys €63,497 of today's money. On the €58,000 you will have paid in, the real gain is €5,497 over twenty years: your return was not 5 %, but 0.76 %. It is the same mechanism that eats away at wealth as a whole, and it only shows if you compute it.

None of this means you should not invest — the alternative, leaving the money in a current account, gives a real return of −2 %. It means the three levers that matter are not the ones people think: time first, fees second, target return last. The first is free, the second is negotiable, and the third cannot be decreed.

Compound interest

One year's interest earns interest of its own the next year. Which is why the curve does not rise in a straight line: it opens slowly over the first years, then accelerates — and most of the final capital is built in the last third of the period.

Management fee

A percentage of your balance taken every year, whatever happens. It looks harmless because it is small; it is considerable because it applies to a growing capital, and because it also eats the interest that capital would have earned.

Today's money

What a future sum will be worth, expressed in what it buys now. At 2 % inflation, €100,000 in twenty years buys €67,000 — the only figure you can compare with your current budget.

Real return

The return left once fees and inflation are removed. It is the only one that describes getting richer: a savings account at 1.7 % under 3 % inflation has a real return of −1.3 %, and loses purchasing power every year.

The four figures, and which one really counts

1. 1

   Time

   The only free lever, and by far the most powerful. Twenty years at 5 % turn €58,000 paid in into €108,000; thirty years into €208,000. Ten more years cost nothing and double the result.

2. 2

   Fees

   The only negotiable lever. One point less in management fees is worth more, over thirty years, than one point more in return — because it is certain, where the return is not.

3. 3

   The monthly contribution

   Regular beats large. €200 a month for twenty years beats €40,000 invested in one go halfway through, and smooths the entry price along the way.

4. 4

   The return

   The one quoted first and controlled least. Take the bottom of the range: an optimistic projection is only corrected by discovering, too late, that a third of the capital is missing.

This calculation ignores tax, which depends entirely on the wrapper the money sits in — life insurance, PEA, PER and a securities account are not taxed alike, at entry or at exit. And it assumes a constant return, which markets never are. For the rest, [take stock of what you have first](netWorth): a projection is only worth its starting point, and the path of real wealth never looks like a smooth curve.

Frequently asked questions