When setting up a savings plan, it’s a good idea to think about more than just how much money you’ll need in the future. You should also be looking at ways your money can earn more money for you.
Fortunately, this is a lot easier than it sounds. In fact, just about the only way you can keep from earning more money with your savings is to put it under your bed or in a safe. If you take your money to a bank, over time you’ll make more money and you won’t have to do a bit of work for it.
That’s because banks offer interest. In exchange for opening an account and giving the bank your money, the bank agrees to increase your money by a certain percentage every year.
For instance, if you were to take $100 and put it in an account that offers 6% interest, by the end of the year the bank will have given you six dollars. So, without doing anything, your savings have grown to $106.
At first, interest might not seem like a lot of money. But it grows over time. And it can add up very quickly – thanks to a powerful moneymaking tool known as compound interest. Put simply, this is interest earned on interest.
Let’s look again at that $100 in an account earning 6% interest. The $106 you have after the first year would earn 6% again the next year – $6.36, or a 36 cent increase. After you add that to the total, you would have $112.36. And that new total will then earn 6% the following year – $6.74, another increase.
As long as you leave the money in there, it will keep earning more. If you left that same $100 in a 6% interest account for 40 years, you’d have $1,028, and your annual interest earnings would be more than $50 per year.
Still not impressed? Sure, 12 years is a long time to double your money. But that’s only if you put your money in once and leave it. If you keep contributing, your money will really grow.
Consider that 6% account one more time. If you were to put in another $100 each year for 40 years, you’d wind up with $17,433 and you’d be earning more than $1,000 in interest. So it really pays to start saving early and regularly.
Just as banks give, they can take away. If you’re not careful, penalties and fees can cut into your interest. Sometimes they even eat into your actual savings. So it’s important to read the fine print when you open an account so you can know where the potential pitfalls might lie.
Not all savings accounts are the same. Different banks offer different interest rates. And individual banks typically offer a number of savings account options from which to choose.
Before opening a savings account it’s a good idea to figure out how you’ll be using it. Ask yourself:
All of these factors can have an impact on how much interest you can earn. A simple rule to keep in mind is that time is money. The longer you’re willing to leave your money alone in an account the higher interest you’re likely to earn. Similarly, banks tend to offer higher interest if you’re willing to keep a minimum balance. These can range from $100 to thousands of dollars.
While there are many different savings options available, they all fall into three main categories: