Compound earnings is a simple concept that could potentially reap big rewards for you.
How Compounding Works
Compounding is powerful because it allows you to make money not just on the money you contribute to your TSP account every year, but also on the money that it earns. Compounding makes it possible for your retirement savings to increase exponentially.
For example, if you start with $100 and, over the course of a year, you earn a 5% rate of return, at the end of the first year, you'll have $105. If you leave that money alone, and the next year you also earn a 5% rate of return, you'll have $110.25 at the end of year two.
So, in the second year, you earned 5% on your original $100 contribution and another 5% on the $5 you earned during the first year. At this rate, your original investment is doubled in less than 15 years.
Benefits of Compounding
Of course, it is impossible to know what your rate of return will be in any particular year, but it is important to understand how the power of compounding works in your favor.
The more years you have to save, the more effective it is. So the earlier you begin contributing to the TSP, and the longer you are able to leave the money in your account, the greater the opportunity you have to enjoy the benefits of compounding.
For a more complete illustration of compounding, visit Earnings Potential of Your TSP Account.
You can also generate your own results using the TSP calculator How Much Will My Savings Grow?
