Making Smart Saving Decisions
Posted by Samantha VanSchoick
Believe it or not, interest can be a great thing.
How?
Many of us know that simple interest is earned by funds deposited in a savings account, so you can make your money grow. However, not as many people know how compound interest works. Compound interest is a tool that allows you to collect interest on interest you have already received.
For example, if Tony put $100 dollars in a savings account with a 5% interest rate, he would have $105 dollars at the end of one year. The next year, Tony would earn 5% on $105, making his money grow faster. In the first year, Tony only made $5, but in the second, he made $5.25. The longer Tony leaves his money in the account, the more his money will make grow.
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| Did you know?
Benjamin Franklin was a believer in the power of compound
interest. In his will, he left 1,000 pounds to the cities of Boston and Philadelphia
to be invested with a 5% interest rate compounded yearly. After 100 years, the
cities would be allowed to withdraw three quarters of the money to spend on
city improvement projects and the rest was to be reinvested for another hundred
years.
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Tips:
- Start early! The sooner your money is invested, the sooner your money will grow.
- Deposit often! By regularly depositing money into your interest receiving accounts, you can enhance the effect of the compounding interest.
- Don't touch! I know, that new fishing rod or those shiny pumps look tempting, but allowing your money to stay where it is and keep growing can make all the difference when considering life decisions, such as when you can retire.
Paying the minimum balance on credit cards is a damaging way that compound interest could work against you. Every month, your charges are added to your total balance. By only making the minimum payments, you could soon be paying interest on your interest and that movie you saw three months ago just cost you many times the price of admission!
Learn more about saving and investing basics.
