One of the key traits federal employees need to understand is how compound interest works and the importance of making your money grow faster. The Rule of 72 is a very basic way of demonstrating the value of compound interest. Compound interest is simply interest on top of interest. This is especially important as you understand the importance of you TSP account and the growth of your money – along with the matching contributions of your employer.
“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”
– Albert Einstein
In simple terms – the number 72, when divided by the rate of interest your earn on your savings will equal the number of years it takes to double your money. The Rule of 72 demonstrates the value of compound interest over simple interest and how your money doubles at a faster rate.
Ex. If you earn 9% on your money it takes approximately 8 years to double your money.
or 72 / 9 (%) = 8 (years)
Putting away 40.00 and earning interest of 5% or $2.00 increases your savings to $42.00. The period of earnings will not be calculated going forward on $40.00, but on $42.00 and so on and on allowing the rate of interest to compound, thus building up your savings quicker.
There is no strategy or mechanism that should not be reviewed and analyzed that will help to strengthen the performance of your money in your retirement years and beyond.
P. S. Always Remember to Share What You Know.
For more information on your TSP account and how to maximize your retirement income click here.
Different TSP funds have different rates of expected growth – to learn more read this.
