Understanding and Developing A Savings Plan
One of the most important lessons that parents teach their children to keep them on the right path of life is about how to save money. Teach your children about finances by opening an account and setting money aside. They will learn about patience, interest and saving.
Saving money is not easy for some people, it is something that you can easily forget or ignore. We all too often are saying that there is not enough money to put into savings and we will do it later. But if there is not enough money to put into savings, is there enough money if there is an emergency. By having a savings plan, you can keep an emergency from destroying your finances.
Savings can be anything from a simple savings account to bonds and retirement plans. You may be saving for emergencies, college fund, new home or retirement. Or even for all of them. Whatever your goal is, there is a savings plan that will fit your needs. Despite, not all types of savings are going to work for you. You have to find the plan that fits your own personal financial needs.
The beauty of saving money is interest that makes your money is making more money. You are not just saving your money, you are actually letting it grow. How does this work?
When you put money in a savings account, certificate of deposit (CD) or money market account, you are basically lending the money to the bank. The bank will use your money to make loans to other customers. They are borrowing money from you and paying you interest, while someone pays them interest on the money they have borrowed from the bank.
Banks charge higher interest rates on loans so that they can pay your interest, while make their own profits.
Interest can seem like a complicated math problem, but it is not hard to understand. Most banks will talk about both “rate” and “yield.”
For example, a $10,000 CD with a 5% annual interest rate (APR) will also have an annual percentage yield number (APY) that is a higher number. The difference between the APR and the APY depends on how frequently the interest is paid, and in what form.
If the interest is paid annually at a rate of 5%, the $10,000 investment with earn $500. Simply multiply the investment amount by the APR to determine the interest paid. When the interest is paid annually, the rate and yield are the same.
The yield goes up as interest is paid more frequently. The interest begins to earn interest along with the original investment. When the 5% CD is paid twice a year, in six months the interest payment is $250. We figure this by multiplying the original investment by the interest rate for half a year, or 2.5%. The $250 in interest will earn $6.25 in interest over the next six months, adding $256.25 at the next six month mark. Compound interest is starting to take over.
In the first scenario, the CD earned $500 in interest in one year. The rate and yield is at 5%. The second CD earned $506.25. The rate is still at 5%, but the yield has increased to 5.06%. It may not seem like a lot, but over time it keeps building up. When shopping around for savings plans, look at both rates and yields.
The followings are saving calculator that you can use to calculate how much the future value of your current savings and how much future income an existing balance and savings plan can provide
| Title: | What Could My Current Savings Grow To? |
| Description: | Compound interest can have a dramatic effect on the growth of series of regular savings and initial lump sum deposits. Use this calculator to determine the future value of your savings and lump sum. |
| Title: | Income Generated By A Savings Plan |
| Description: | Saving regularly can help you achieve your future income goals. Use this calculator to determine how much income an existing balance and/or a regular savings plan can provide. |
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