What is the most important strategy for saving money?
- Time
- Consistent savings
- Higher interest rates (or rate of return)
- Compounding
- All of the above
"E" is the correct answer.
Time is on your side. The sooner you begin saving, the quicker you can make your dreams come true. No amount is too small to get started.
Consistency is the key to building your savings. What you save isn't as important as the need to regularly sock something away. Always pay yourself first. A good habit is to save at least 10 percent of everything you earn.
Don't put all of your eggs in one basket. Think long term for your future goals--college, a home, retirement--and short term for other expenses. This way you won't be tempted to dip into your retirement fund for things like car repairs, clothes, or whatever else may come up.
Rates of return vary according to the investment. For instance, regular savings accounts pay lower interest than certificates of deposit (CDs). But you can access your funds in your savings account anytime. CDs require a minimum balance and restrict withdrawals for periods in return for higher interest rates. But risk is low since both accounts are insured.
Potentially higher yielding options like mutual funds, stocks, and bonds carry greater risk. With these types of investments, you could lose earning PLUS some or all of your invested funds. Generally, long-term savings can be invested in these types of investments because over time the losses and the gains balance out. Sometimes, the gain will be significantly higher than the earnings from insured accounts. But predicting the stock market is risky business, too.
Compounding, or reinvesting earnings, is the key to building your fortune. In fact, it's almost like magic. The really big changes in your balance will occur in the later years-but only if you start early.
Check the following chart to see the dramatic effects of compounding. Look what happens if you deposit $110 at 15 years of age and let it earn interest until age 65. The chart shows what happens with just $110. Imagine if you added to it from time to time?
Yes, you would be a millionaire! As you can also see the higher the interest rate, the more dramatic your earnings will be over time.
| The Magic of Compounding |
| Age | 5% | 10% | 15% | 20% |
| 15 | $110 | $110 | $110 | $110 |
| 20 | $140 | $177 | $221 | $273 |
| 25 | $181 | $285 | $445 | $800 |
| 30 | $229 | $460 | $895 | $1,695 |
| 40 | $372 | $1,192 | $3,621 | $10,494 |
| 50 | $607 | $3,091 | $14,649 | $64,974 |
| 60 | $988 | $8,018 | $59,265 | $402,299 |
| 65 | $1,261 | $12,913 | $189,851 | $1,001,048 |
It may be a bit unrealistic to assume that you'll earn 20% interest over a lifetime of saving. So to reach a million dollars by age 65 when earning an average of 10% interest, you'll need to start with $7,000. While $7,000 may sound like a lot right now, remember that's all it takes to become a millionaire!
For more information about savings, budgeting, or anything financial, visit Googolplex.
Certificate of Deposit (CDs): A debt instrument from a financial institution. When you purchase a CD from your credit union, you're lending it that amount for a specific period, for which you'll earn a specific amount of interest. If you want your money back early, you'll usually have to pay a penalty.
Savings account: A business agreement in which a credit union or other financial institution agrees to hold and pay interest on money you've deposited. You may withdraw some or all of your money, but not by writing a share draft or check.
Compounding: Earning interest on principal saved and on previously earned interest.
Compound interest: Interest calculated not only on the original principal that was saved but also on the interest earned earlier and left in the account.
Money Market Deposit Accounts: Sometimes referred to as a money market account, this is an insured deposit account with no maturity date. It is offered by most financial institutions. Some accounts have limits on withdrawals and others may have check writing privileges such as Sun East's Premier Money Market account.
Bonds: A bond is a type of loan to the government or a company that is repaid at the end of a term with interest. You can buy bonds with maturity dates of a few months to a few decades. Choose the issuer (government or company) carefully. If they default, they will be unable to pay you when the bond matures.
401(k) and Individual Retirement Account (IRA): These are two types of long-term savings accounts for retirement with different tax advantages. A 401(k) is generally offered by your employer. An IRA can be obtained through a financial institution or discount brokers. There are several different types of IRAs, so discuss your options with a professional.
Mutual Fund: A mutual fund is a pool of money managed by an investment company. You buy shares of the fund as you would buy shares of a stock. Experts suggest it takes many years for your money to grow substantially. There are other kinds of funds, such as index or exchange-traded. If a mutual fund sounds good to you, then see if some of these funds sound even better.
Stocks: Stocks are partial ownership in a company. It takes time, effort and research to start investing in stocks, so be prepared to make a commitment. It can be rewarding and exciting, but you should have other dependable savings before jumping into the stock market on your own.
Click here for more information on savings options.
Click here for more information about investments.
|
About Us | 
