Compound interest: Reinvest interest or withdraw it?

Reinvesting lets you gradually grow your invested capital and benefit from the compound interest effect, while withdrawing interest gives you a regular extra cash flow you can use for everyday needs or other goals. Both approaches are sensible, but over a longer period their results can differ significantly. Let's look at how both scenarios play out after 1, 5 and 10 years and how to tell which one better fits your financial priorities.

In short

• Reinvesting means the interest you receive is invested again, increasing the capital that keeps earning a return.

• Withdrawing interest lets you use the investment income right now without reducing the original amount invested.

• The compound interest effect becomes stronger over time, so reinvesting is especially worth considering if your investment horizon is longer.

• If regular income is your priority, withdrawing interest may be the more suitable choice.

• The choice does not have to be made forever. As your financial situation and goals change, you can review your strategy.

What do reinvesting and compound interest mean?

Reinvesting means investing the interest or other profit earned from an investment again, rather than withdrawing it for personal needs. This increases the total invested capital, and future returns are calculated on a larger amount.

Two related concepts will help you understand this principle.

Compound interest is interest calculated not only on the original investment but also on interest previously earned and reinvested.

Interest capitalisation is the process in which accrued interest is added to the principal, increasing the base on which future returns are calculated.

It is important to understand that reinvesting does not in itself mean a higher interest rate. Its advantage is the opportunity to earn, over a longer period, on previously accumulated income as well.

At first the difference is small, but it grows every month, because the interest earned earlier also starts generating new income.

How does reinvesting affect long term investment returns?

In the long run, reinvesting can significantly increase the total value of an investment, because the compound interest effect grows stronger over time.

All calculations in this article are illustrative, gross and before tax. Actual returns may differ, and future conditions may change.

Let's look at a simple example where 1,000 euros is initially invested at a 6% annual return.

To compare both scenarios on equal terms, let's assume interest is paid once a month and reinvested immediately after it is received. The calculations use a 0.5% monthly return, assuming the annual return stays the same throughout the period. In practice, reinvesting may happen less often, for example if the product has a minimum investment amount.

After 1 year

If you withdraw the interest, you receive 60 euros during the year, while the investment principal is still 1,000 euros.

If you reinvest the interest, the investment value will reach about 1,062 euros, meaning that on top of the original 1,000 euros you will have earned about 62 euros.

In the first year the difference is still small.

After 5 years

When withdrawing interest, total income will be 300 euros, while the principal remains 1,000 euros.

When reinvesting, the investment value will reach about 1,349 euros, meaning you will have earned about 349 euros.

The difference between the two options is already almost 49 euros.

After 10 years

If you keep withdrawing interest, total income will reach 600 euros, while the original investment remains 1,000 euros.

By reinvesting regularly, on the other hand, the investment value will reach about 1,819 euros, and you will have earned about 819 euros.

At this point the difference between the two scenarios already exceeds 219 euros.

When making a decision, also remember that the compounding effect works in both directions. If an investment makes losses, this can also reduce future opportunities for capital growth.

When is it worth withdrawing interest instead of reinvesting it?

Withdrawing interest is a suitable choice if the goal of the investment is not to grow capital but to receive regular extra income. For example, if:

you have specific expenses you plan to cover from investment income,

you want to top up your monthly budget with extra cash flow,

you are planning larger purchases or other financial goals in the coming years,

access to money is more important to you than maximum capital growth.

However, it is worth thinking about what happens to the withdrawn interest. If it simply sits in a current account and is not used, this money becomes idle. Read more about this in the article What does cash drag mean in investing?, and about options for where to keep spare money in the article on where to park money in Europe.

Reinvesting and withdrawing interest are not mutually exclusive strategies. If regular extra income is not that important right now, reinvesting lets you take advantage of compound interest. If at some point cash flow becomes more important, you can switch to withdrawing interest. You can also combine both approaches: withdraw part of the income and reinvest the rest.

How is interest calculated and paid out in TWINO FLEXI?

TWINO FLEXI offers a fixed 6% annual return with no fixed term. Funds can be withdrawn at any time, but withdrawals depend on the product's liquidity, and in periods of high demand they may take longer.

How it works in practice:

Interest is calculated every day on the actively invested amount.

Interest is paid out every month according to the payment schedule.

Interest payments are credited to the FLEXI wallet as FLEXI Cash.

FLEXI Cash (uninvested funds) does not earn interest.

FLEXI Cash, including received interest, is invested automatically when suitable investments are available and the wallet balance reaches 10 euros.

A 6% fixed return does not mean this result is guaranteed.

The actual return depends on how long the money has been actively invested. If almost the entire amount is invested for most of the year and there is little FLEXI Cash, the actual return will be closer to 6%. If part of the funds waits longer in the FLEXI wallet to be invested, the actual return will be lower. Frequent deposits and withdrawals also affect it, because they change how long the money has been invested.

You will find more information about TWINO FLEXI, including how interest is calculated and paid out, on the product page, in the FAQ section and in the prospectus and terms.

Remember that FLEXI is not a bank deposit and is not covered by the state deposit guarantee. Before deciding, you should assess the investment risks, including the possibility of losing part or all of the invested capital.

Can reinvesting be automated?

Yes. On the TWINO platform, repayments from fixed term loan securities, meaning the principal, the interest or both, can be automatically transferred to the FLEXI wallet. This setting can be switched on in the investor profile, and funds that reach the FLEXI wallet are invested automatically when suitable investments are available.

Auto invest can reduce the time money sits unused and help you consistently follow your chosen strategy.

However, automation does not remove the need to keep track of investment results, risks and whether the chosen strategy still meets your needs.

Frequently asked questions

Is reinvesting always more profitable than withdrawing interest?

No. Reinvesting can increase the value of an investment in the long run, but withdrawing interest gives you cash flow you can use right now. The more profitable approach depends on the goal of the investment and your financial situation.

How often should interest be reinvested?

The sooner after receiving it you manage to reinvest the interest, the sooner it starts earning an extra return. However, you need to take into account the specific investment's payout schedule and reinvestment conditions.

Is it worth reinvesting small amounts?

Yes. Even with small amounts, the difference grows over time, especially if they are reinvested regularly. For example, 1,000 euros at a 6% annual return gives a result about 219 euros higher over 10 years than withdrawing interest. What matters most is consistency and a sufficiently long investment horizon.

Can I start by reinvesting interest and withdraw it later?

Yes, if the investment terms allow it. Many investors find this practical, because at first the priority may be growing capital, while later regular income becomes more important.

Conclusion

Reinvest or withdraw? The key is to choose the solution that matches your financial goal, time horizon and willingness to take risk. The TWINO platform offers various investment options, including the flexible TWINO FLEXI, which lets you shape your own approach to investing and access funds according to the product terms.

Email: [email protected]
Address: Dzirnavu iela 42, Riga, LV-1010, Latvia

This material is for informational purposes and is not individual investment advice.