There are so many things that we teach our children that keep them
on the right path throughout life. How to save money is one of the most
important lessons that parents teach their children. Teach your
children about finances by opening an account and setting money aside.
They'll learn about patience, interest and saving.
It's easy to
forget, or ignore, the need to save. We all too often are saying that
there isn't enough money to put into savings and we'll do it later. But
if there isn't 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, a new home or for retirement. Or even
for all of the above! No matter what your goal is, there is a savings
plan that will fit your needs. Not all types of savings are going to
work for you. You have to find the plan that fits your own personal
financial needs.
What makes saving money just a wonderful
experience is interest. You aren't just saving your money, your
actually letting it grow. Your money is making more money. 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, plus make their
own profits.
Interest
can seem like a complicated math problem, but it isn't 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.
Martin Lukac, represents http://www.RateEmpire.com and http://www.1AmericanFinancial.com,
a finance web-company specializing in real estate/mortgage market. We
specialize in daily updates, rate predictions, mortgage rates and more.
Find low home loan mortgage interest rates from hundreds of mortgage
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