by America Saves
3. March 2010 11:31
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This month’s e-Wealth Coach is MP Dunleavey. MP Dunleavey is the editorial director of DailyWorth.com, a free daily email about money management for women. She is an award-winning personal finance columnist for MSN Money and the author of “Money Can Buy Happiness,” winner of the 2007 Books for a Better Life Award in personal finance. She wrote the long-time “Cost of Living” column for the New York Times. |
Making the commitment to become a steady saver is a vital first step toward financial peace of mind and, ultimately, greater security and wealth.
Now comes the fun part: In order to reach the “greater security and wealth” part of the equation, you must learn how to make your savings grow, thanks to--you’ve heard it before—“the miracle of compound interest.”
How Money Snowballs
What exactly is compound interest? And what makes it so miraculous?
If you saved $50 per month, by putting into a zero-interest coffee can, at the end of 10 years you would end up with $6,000 stashed in your little can ($50 X 12 = $600. $600 X 10 years = $6,000). Sounds OK.
Now, let’s assume that you deposited your savings into an account that earned 3% interest per year. In 10 years you’d have about $6,990—almost $1,000 more.
That’s because, every year you’d earn interest on your deposits, and the next year you’d earn interest on your interest (plus the additional deposits)…and your cash would snowball. You can see it for yourself in this chart, and plug in some of your own numbers into this calculator.
The Magic of Time
The sooner you begin saving, and the longer you allow compound interest to work its magic, the more money you’ll gain.
If you also save money in your retirement account (and we hope you are), that money is usually invested in mutual funds, which typically have an even higher yield over time. If you deposit $100 per month into your 401k, let’s say, which earned 8% per year on average, for 30 years, you’d end up with about $141,761.
Your total cash contributions over 30 years would be only $36,000—but the compound return from the stock market would give you an additional $105,761.
It’s a powerful reminder that even the smallest steps in the right direction add up to big changes—and in some cases big money—over time.
Where to Find the Best Rates
How much interest does your savings account yield now? You can check your statement or call your bank or credit union, but don’t be surprised if the interest rate is disappointingly low—perhaps less than 1%.
That’s all right. Many institutions offer higher rates if you’re willing to look beyond the bank next door. You can set up automatic, secure electronic deposits to almost any account that offers a good rate. A savings account is simplest, but for higher yields, you may want to consider a money market account (MMA) or a certificate of deposit (CD).
Money market accounts and CDs have more restrictions; most limit the access to your cash, and some have minimum deposit requirements.
The sooner you start looking, the faster your money will grow.
Good luck and keep saving!
