Money Matters: How a Simple Savings Account Grows
If you put a small amount of money into a savings account on a regular basis and leave it untouched for years you may be amazed at how much it can grow. The reason is regular deposits, combined with interest. The bank has to pay you for utilizing your money, in the form of a fee, or “interest.” The more you save, the more you get in interest.
For example, let’s say you put money into a savings account that pays interest every month. After the first month, the interest will be calculated based on the money you deposited. The next month, the interest will be calculated based on the money you put in as well as the interest that you already earned from the previous month. If you continue to make deposits, your balance and interest earned becomes larger. The earnings are called compound interest.
Types of Deposit Accounts
· Savings accounts—this is the most common type of bank account and will allow you to keep you money in a safe place while it earns some interest each month. There will probably be a small minimum balance, like $25.
· Certificates of deposit—this is where you agree to let a bank use your money for a period of time, usually 6 months, one year, five years, or more. In exchange, you earn a higher rate of interest than you’d get if you had a regular savings account because you cannot take money out without a penalty fee. When you cash in the CD, you get the original amount you invested and the interest the bank owes you.
· Money market accounts—these are like savings accounts, but you get higher interest. However, the bank may only allow you to make a limited number of withdrawals each month.
Banks offer different interest rates, so it pays to shop around for one that offers the most interest.
The key is to make regular deposits into your account! Try to develop a strategy for saving if you find it difficult. Make a deal with yourself that every time you receive money, from a gift or extra job, you’ll put all or some of it in your account.
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