How can you live without knowing what generates compound interest?

I have prepared the final **list of proven investments that generate compound interest.**

Instead of explaining again the compound interest formula here, I focus on how to apply it to investments.

**What are the best compound interest investment examples? **

I have a list of 9 examples.

Here you will find real examples of how to create compound interest by investing.

Let’s read on.

### List of investments ideas to create compound interest

I will now review some of the methods that I use to generate compound interest by investing in the long term.

I’ll answer the question, *“Where to invest with compound interest?”*

Table of Contents

## 1. Monthly investment in ETF

One of the most popular and statistically proven methods to achieve high (but not stable) returns is to invest in long-term ETFs.

In the US they call it DCA.

The strategy involves continuous monthly investments in low-cost ETFs (or mutual funds) that include global equity and bond index.

Statistics suggest that markets (especially the US markets) have averaged 8% over the last 100 years.

For this reason, investing in ETF can lead to impressive results.

- Risk: Medium/Low over the long term🌶🌶
- Max percentage of portfolio: 80%
- Effort required: Very high
- Effectiveness: High ⭐️⭐️️⭐️⭐️

## 2. Real estate

Real estate has always been a popular asset.

*BUT*

*The myth that investment in real estate is always growing in value has to be debunked.*

It is very easy to make a bad real estate investment and lose money. To create an income from a property you need to know a long series of factors.

Besides, before stating that a property has a positive return you need to subtract from the final calculation all taxes and all costs incurred during the ownership period.

Incredibly in the western world the net yield of a *rental property* does not exceed 4% on average and managing more properties can be a full-time job.

Moreover, the annual net yield of a property is NOT calculated only by adding up the rents received for 12 months.

- Risk: Medium (difficult to diversify)🌶🌶🌶
- Percentage of portfolio max: 60%
- Effort required: Medium/High
- Effectiveness: Medium/High ⭐️⭐️⭐️

## 3. Peer to peer lending

Investing in peer to peer lending means investing in direct loans. Returns are normally much higher compared to the stock market but also the risks are higher.

Investing in peer to peer lending is very passive, you can fully automate the process. After the initial setup, there is not much to do but checking the interest flowing in.

The main advantage of P2P lending used to create compound interest is that the compound frequency can be very high (and thus skyrocket the effect).

To get a complete idea of what tools are available from those who invest from Europe you can scan through this list of P2P lending sites.

Please note that P2P lending is not a suitable asset to cover too much of the total assets.

- Risk: High without proper diversification 🌶🌶🌶🌶
- Percentage of portfolio max: 20%
- Effort required: Very low
- Effectiveness: High ⭐️⭐️⭐️⭐️

## 4. Robo-advisors

There are investment platforms online that can manage money for us in total autonomy.

Usually, they use artificial intelligence but also real financial advisors to do the job.

Their service consists of managing and balancing investment portfolios automatically. Those who do not have the time or ability to invest their money are their best customers.

Of course, a real human financial advisor can be better but the costs would be much higher. For small and medium amounts it is fair to rely on a robo-consultant online.

The best Robo advisor I know is by far Moneyfarm (review).

- Risk: Low 🌶🌶
- Max percentage of portfolio: 70%
- Effort required: Very low
- Effectiveness: High ⭐️⭐️️⭐️

## 5. Real estate crowdfunding

New technologies make it possible to buy fractions of real estate projects from home, just with the aid of a computer.

These are generally real estate loans related to specific projects.

Basically, with real estate crowdfunding, a developer presents a project on a dedicated platform. He explains what he wants to do (renovation, building from scratch, ask for a bridge loan) and he shows the data of the project. The numbers we care about as investors are: the interest he will pay each month, the duration of the loan and the properties he offers to back the loan.

Real estate crowdfunding returns can be as high as 12% per year.

This is the most popular and reliable website in Europe for this type of investment.

- Risk: High 🌶🌶🌶
- Percentage of portfolio max: 20%Effort required: Low
- Effectiveness: High ⭐️⭐️⭐️⭐️

## 6. Trading stocks

Is it possible to generate compound interest by trading stocks?

If I reinvest all the profits made with an online trading activity I can generate compound interest.

This presupposes the ability to trade stocks profitably in a stable and lasting way. Unfortunately, it is extremely difficult to generate stable earnings with a stock trading activity.

- Risk: Very high 🌶🌶🌶🌶🌶
- Percentage of portfolio max: 10%
- Effort required: Very high
- Effectiveness: Medium ⭐️⭐️

## 7. Bonds

There are several ETFs and bond index funds that are accumulating rather than distributing profits.

Only these are suitable for generating compound interest.

- Risk: Low 🌶
- Max percentage of portfolio: 30%
- Effort required: Medium
- Effectiveness: Medium ⭐️⭐️

## 8. REITs

REITs are not the best example of a tool to generate compound interest but by reinvesting all the profits then you can have an increasing benefit.

- Risk: Low 🌶🌶
- Percentage of portfolio max: 20%
- Effort required: Medium
- Effectiveness: High ⭐️⭐️⭐️

## 9. Cryptocurrencies

Cryptocurrency cannot be used to generate long-term compound interest and profits. Cryptocurrencies (like all currencies) do not generate dividends or interest, so there is nothing to compound.

I have added cryptos on this list because a lot of people believe this is possible.

On the contrary, trading cryptocurrency is not compatible with the quiet generation of compound returns. Brokerage costs can be high.

- Risk: Very high 🌶🌶🌶🌶🌶
- Max percentage of portfolio: 5%
- Effort required: Low
- Effectiveness: Unknown ⭐️

## Investments that do NOT provide compound interest

Some years ago even very conservative investments could generate compound interest.

I’m thinking of high-interest deposit accounts.

These don’t exist anymore.

That is, they exist but they no longer pay sufficient interest to create enough compounding effect.

So, yes, savings and deposit accounts generate some compound interest, but no, it is not enough to compound in a lifetime.

Life duration is limited. Thus time to compound interest is also limited. If my investment generates only 2% a year, I’ll need 36 years to double the initial figure. As you can see, this may be too slow.

So technically yes, it is compounded interest generation, but in practice, it is not enough to do what we need to do.

List of investment that can’t generate reasonable compound interest (anymore):

1. Savings accout

2. Government bonds (OECD)

3. Rental properties (some)

4. REPO

5. Certificates of deposit

**Let’s be very honest, those who are not born rich have only two legit ways to improve their financial situation by investing:**

- One is to invest in very high-risk assets
- The other is to generate long-term compound interest on the savings

To obtain compound interest you need investments with high interest but still reasonable. Time is the real multiplying lever.

## What is compound interest?

Compound interest is the principle that when I invest, in addition to earning interest on the investment, I also earn “interest on interest”.

In the US they call it the “snowball effect”, that is something that has an exponential growth over time, not linear.

Taking advantage of the exponential growth created by compound interest is necessary for investors seeking to optimize their portfolio in the long term, but not only. Compound interest is also important to mitigate two strong negative factors for wealth generation. These are the relentless rise of the cost of living and inflation.

Let’s move on.

## Example of compound interest

To understand what compound interest is, I have prepared a powerful example.

When the bank pays interest on my deposit account, I am receiving simple interest.

For example, on a deposit of 1000 euros, if I get an annual interest of 10% my gain after one year will be exactly 100€.

So far everything is clear. 1000€ has become 1100€.

But what happens after two years?

Be careful because this is where the game changes.

The second year I will earn interest on my initial deposit but I will also receive interest on the interest I earned the year before.

So the second year the interest I will earn is not the same as the first year, it’s more. It will be higher because the balance of my deposit account will be 1100€, not 1000€ (initial capital). So, I have not added any money and yet my earnings increase.

Let’s see what happens year after year:

- Year 1: I deposit 1000€ and earn 100€ because I got 10% interest. End of year balance 1100€.
- Year 2: I start the year with 1100€ and I get the same interest again, 10%. At the end of the year, I will have 1210€.
- Year 3: My balance of 1210€ will have the usual 10% interest again. At the end of the year, I will have €1331.
- Year 5: 10% interest and new final balance continuing this way become 1610€.
- Year 10: Usual 10% interest and new balance? 2593€.

Hey, wait a minute. How is that possible?

My 1000€ if it increased linearly by 100€ per year would become 2000€ after 10 years, not 2593€.

**Where does the extra 593 come from?**

*Say Hello* to compound interest.

What if I wait 40 years?

After 40 years my little 1000€ invested as before at 10% becomes a huge percentage. We’re talking about 45.000€.

From 1000 to 45,259. 45 times more.

If I had applied a simple interest rate, after 45 years I would have 1000€ initial capital + 100€ (the annual interest) X 40 (the past years). So only 5000€ in total.

- Simple interest. 1000€ invested at 10% for 40 years = 5000€.
- Compound interest. 1000€ invested at 10% for 40 years = 45.259€.

At the same time, I generated 40,000€ more from the same initial capital by simply reinvesting the fruits of the capital without adding more money.

I know. Now you’re dizzy.

That’s normal. *Drink some water and breathe deep.*

You have to keep in mind that this example takes into account the most conservative hypothesis, that the interest-only compounds at the end of each year. In truth, it is even better because many investments bring monthly or even daily interest (frequency). The calculation does not take inflation into account.

### List of key factors

Various factors influence the outcome of those who invest by exploiting compound interest.

**Start to invest as soon as possible**

It sounds corny, I know.

Saving is one of the most boring words ever. Understandably, it’s also the last thing that comes to mind when you’re young.

The trend is to start saving late. Usually, the first serious job only comes a few years after graduation, so it’s very late. Today we start working, so we start earning and saving, very late compared to the past. Besides, we live much longer. It is necessary to start saving and investing as soon as possible.

**To save is not enough**

It is NOT enough to save money. The capital left in the savings account loses value over time, it does not stay the same.

Learning how to invest is crucial because nobody can do it better than ourselves. I use more long-term strategies to maximize results and to avoid to concentrate risks.

**Establish the duration of the investment**

The stronger effects of this calculation are visible in the long term. After 10, 20 or 30 years the differences are abysmal.

Even if you start late, important results can still be achieved.

**Limit “stop & go”**

Life does not proceed linearly.

So it’s quite normal that there will be some interruptions and resumptions in the long-term investment process. The longer the periods in which you don’t save/invest, the further away you go from the goal.

**Optimize Taxes**

Optimising taxes is crucial.

The only attention that certainly should not be overlooked is in the choice of the tools. For example, ETFs can be accumulating or distributing.

**Lowering commissions**

Long-term investment doesn’t mean taking the loot and leaving it there for 40 years. It can be done, of course, but normally we make monthly contributions to a specific account on which we keep our savings. I need to know exactly how much I pay to invest and cut these costs.

An easy way to reduce investment costs is to make quarterly rather than monthly payments.

**Pay attention to the interest rate**

The higher the interest rate I can charge on my money, the faster I will reach my goal.

A popular way is to invest in global ETFs according to a long-term strategy but I also to use other powerful assets.

I have been using peer to peer lending, real estate crowdfunding, the stock exchange and many other methods to generate long-term benefits for years. The important thing is not to focus too much on one tool.

8. **Implement regular additional deposits**

It is normal to start with an initial capital but it is not compulsory at all.

What do you mean?

I mean that if I don’t have an initial capital I can still invest month by month to build “compound interest” in the long term.

Those who think they can protect themselves from losing money by not doing anything are probably losing more money than if they invested with an adequate risk.

Doing nothing is a choice that has consequences, exactly as much as choosing to do… (omission bias)

**Look at the calculation frequency**

The higher the frequency with which interest accumulates, the greater the result. An example of interest calculated on a daily basis (or at each maturity) is peer to peer lending. In real estate crowdlending, on the other hand, the basis is monthly or annual.

## Rule of 72 (Double my money)

What does that mean?

It means that when I invest there will always be a day when I will have doubled my initial capital.

That day is the closer the higher the interest rate is.

I mention this because the most common application of the 72 rule is for compound yield situations.

**The formula is this: 72 / interest rate = doubling time.**

It’s easy and logical.

Follow me.

If I hypothetically invest 100% annual interest after one year I will have doubled my money.

If I invest at 20% interest, the time it takes is obvious. It’ll take me about 3.8 years.

And so on.

## How to get to 1 million euros

By taking advantage of the compound interest, you can reach one million euros even from scratch.

Too good to be true?

Apparently not.

Doubling the value of one euro cent every day, then investing at a daily interest rate of 100%, you can get one million euros in just 28 days. A 100% interest rate isn’t very realistic, but that’s math.

## How to invest in your 20s?

I don’t have much money but I’m young, how do I invest for compound interest?

Let’s do a useful simulation for a 20-year-old starting from scratch.

- Objective: 1 million euros
- Years until retirement: 35
- Fixed monthly investment: 400€
- Interest rate: 8% (historical average market yield)
- Result: €923,670,01 after 35 years

The same 20-year-old if he diligently set aside €400 per month in his current account (zero interest) after 40 years he would find only €168,000 in his account.

What?

Yes. Let’s do the calculation together:

- 400€ per month set aside for 12 months = 4800€ per year.
- 4800€ for 35 years = 168.000€.

## Video Compound interest examples on YouTube

Nothing explains compound interest better than a video.

So I looked for videos about compound interest on YouTube and found an excellent one.

This video is fascinating because it really explains everything in one minute. (OneMinuteEconomics)

## Risk/return & compound interest

When you look at the graphs of the growth of compound interest there is only one desire: **to invest everything at the highest possible return to get to the mathematical results as soon as possible.** Instead, you need to resist temptation and spread your investments over several instruments. To generate compound interest you need:

- Investments with a return
- Initial capital or periodic payments
- Constancy and patience

It is not uncommon to find that very high-interest rates correspond to adequate risks, so you can’t just chase the maximum yield. You need balance.

## Let’s sum up

I’m sorry. There are no shortcuts. To take advantage of compound interest it is necessary to start as soon as possible. The goal is to find the best investment and put money to work.

You also need to find out what tools are available and recognize those that do NOT generate interest on interest. For example, dividends do not generate additional interest if they are not reinvested.

Deposit accounts that offer sufficient interest to generate interest do not currently exist in euros.

To simplify, at the antipodes of compound interest there is the annuity. In annuities, the benefits of the investment can be spent and not reinvested.

Now it’s your turn!

Have you already started?

Did you know about the existence of interest on interest?

How are you generating wealth in the long term?

⭐️ Share your strategy or doubts below about these compound interest examples in your comments…

Well-written, informative and interesting as usual. Thanks, Sal

Hi William, you’re welcome. I really tried to share some useful stuff in this post.

we all love compound interest – but it takes time and patience to get the benefit

That0s great, because we have time, patience and (building) knowledge to get it! Welcome here, Bankeronwheels.

Hi,

In (Section 6 – Trading stocks’, you forgot an easy way to generate passive incomes and compound interest : Dividend stocks. They pay you (usually quarterly), no matter what the share price is.

Cheers

Great, Thanks!