Začínáme s investováním
Interest and Compound Growth Made Simple
Key takeaways
- Simple interest is always calculated on the original amount; compound interest grows exponentially.
- Compound growth works best over a long horizon — time matters more than the size of the initial deposit.
- Accumulating ETFs automatically reinvest returns, so compound growth works without any effort from you.
- Even a small monthly contribution can grow into a million-figure portfolio over decades thanks to compound growth.
Compound growth means that returns from an investment themselves generate further returns — and the value of the portfolio grows faster and faster.
Simple vs. compound interest
You invest CZK 10,000. The interest rate is 10% per year.
- Simple interest: you receive CZK 1,000 every year (10% of the original CZK 10,000). After 10 years you have CZK 20,000.
- Compound interest: in year one you receive CZK 1,000 and have CZK 11,000. In year two you receive 10% of CZK 11,000 = CZK 1,100. And so on — the base grows every year. After 10 years you have CZK 25,937.
The difference seems small. But after 30 years: simple interest gives CZK 40,000, compound interest gives over CZK 174,000. That is the power of compounding.
Why is time the most important factor?
Compound growth works exponentially — slowly at first, then faster and faster. The largest portion of the gain comes in the final years of investing. That is why starting as early as possible is key — even with a small amount.
Example: Pavel starts investing at 25, Jana at 35. Both invest the same amounts and earn the same return. Pavel will have roughly twice as much at retirement simply because he started 10 years earlier.
How does compound growth work in an ETF?
An accumulating ETF automatically reinvests all dividends and returns back into the fund. You do not have to do anything — the fund grows by itself. That is compound growth in practice. Read more about how to make use of this power in the article The power of compound growth.
The Rule of 72 — how quickly will your money double?
A quick estimate: divide 72 by the average annual return and you get the approximate number of years needed to double your money. A 7% annual return? 72 ÷ 7 = approximately 10 years. A 10% return? Approximately 7 years. This rule is not meant for precise calculations, but it helps you grasp the power of returns. How to apply it in practice is explained in the article What is long-term investing and why it works.
FAQ
Does compound growth also work in a savings account?
Yes, but at a much lower rate. A savings account with 3.5% interest will double your money in approximately 20 years. The stock market with an average return of 7% per year can do it in approximately 10 years. Both approaches have merit — it depends on your horizon and risk tolerance.
Do I need to reinvest returns manually, or does it happen automatically?
With accumulating ETFs (Acc) everything is automatic — the fund reinvests dividends by itself. With distributing ETFs (Dist) you receive dividends in your account and must reinvest them manually; otherwise compound growth does not fully work.
Should I invest a large lump sum, or small amounts regularly?
The best approach is a combination: if you have a larger sum, invest it immediately (time in the market matters). And simultaneously set up a regular monthly purchase. Studies show that immediate investment usually outperforms spreading out, but regular investing reduces emotional stress and the risk of bad timing.