Given all of the advantages that come with a savings account, the name ‘savings’ account can be misleading for those deciding whether to use one. Understanding some of the benefits to opening one can ensure that you get the most out of the money you put in the bank. Here are five ways to get more out of using a savings account today:
It may seem that the interest earned on savings is insignificant; however, the returns grow over time. The totals can add up very quickly and turn into what is called compound interest. Essentially, this can be understood as interest earned on the interest you have already earned. For example, if you earn 5% interest on 100 dollars for a year, the 105 dollars you then have earns 5.25$ over the next year. This continues to grow exponentially, turning the five dollars into almost 1,000 dollars over the course of 40 years.
The 72 Rule
An easy way to see the power of saving is to understand the so called “rule of 72”. The formula allows you to calculate how long it will take a given amount of money to double when held in an interest bearing savings account. Just divide 72 by a given interest rate. For example, at the average savings rate of 5%, divide 72 by 5. This tells you that it will take 14 years to double your money at five percent interest.
14 years may seem like too long of a time for most people, however, the rule does not account for those that continue to add more funds. By growing the total of your account each year, you will see the rate of growth increase greatly. For example, if you take our original amount of 100 dollars at 5% interest once more, and add 50 dollars each year for 40 years, you will reach over 9,000 dollars and earn over 500 dollars in interest a year.
Saving Instead of Spending
Having a savings account should not be limited to a storage place for your cash. Rather, it should help facilitate a budget plan. For example, rather than purchasing a new product with loan money or credit, save the money in an account until you can buy the product directly. This habit can help save big money, especially if you do not mind waiting to buy it at a future date.
Choosing the Right Account
Take advantage of all the benefits of saving by choosing a savings account that best fits you. Many are not aware that accounts differ in terms of fees, withdraw or deposit policies and transfer costs. If you tend to make frequent withdrawals, it is important to know that some banks charge fees for excessive transactions and ATM usage. Be sure to speak with the account provider about maintenance fees or other charges that will hurt your balance. Calculate the annual percentage yield for each account you check. When you find the right one you will be one step closer to financial security.