Saving for the Future
If you want to:
- Set aside money for emergencies
- Make a major purchase
- Take a nice vacation
- Pay for a child’s education
- Prepare for retirement
. . . you must save some of the money you earn instead of spending it right away. The easiest way to save is to put an amount each month in a savings account as soon as you get paid and before you have a chance to spend it on something you don’t really need.
Think about this: If you set aside just $10 a week starting when you are 25 and put it in an account earning 4 percent compound interest, you will have saved about $2,800 by the time you are 30, about $16,000 at age 45, and about $40,000 at age 60. If you save more than $10 a week or earn more than 4 percent, you will save much more over time.
Your savings grow because of compound interest that the institution pays on your deposits. Interest is compounded because as soon as it is earned (daily, monthly or annually), it is added to your account and that interest then earns interest too.
If you saved $10 a week at home for 10 years, you would have $5,200. But if you put that $10 a week into an account earning 4 percent compound interest, you would have about $6,300 in 10 years. The $1,100 difference is from the compound interest.
Saving a set amount from each paycheck is the first step. You should try to increase that amount if you earn more or if your monthly expenses can be reduced.
Whenever possible, it makes more sense to save for a major purchase in advance rather than to borrow money to pay for it. Say you want to buy furniture costing $5,000. If you save up beforehand and pay cash, you will spend just the $5,000. If you borrow $5,000 with a consumer installment loan for three years at an annual percentage rate (APR) of 14 percent (which includes the interest rate and fees), you’ll wind up paying $6,152 for your $5,000 worth of furniture because of the cost of the loan.
Savings accounts at banks, savings and loans and credit unions are insured by the federal government, up to $100,000 for each depositor in each institution. Even if the company goes out of business, your savings are fully protected up to the insurance limit and the government will repay your full amount, including interest earned, usually in just a few days. You are not at risk of losing your federally insured savings.
Banks offer several kinds of savings accounts. In some, you can withdraw your money whenever you want without being charged a penalty. Other accounts, which usually pay higher interest, may charge a penalty if you withdraw your money earlier than you agreed to when you opened the account. In many cases, you can arrange to have your savings moved from a checking account into a savings account automatically every month, ensuring that your savings will grow steadily.