Since your savings can grow substantially over time, now is the perfect time to get started. The earlier you save, the more money you'll have in the future.
There are many choices when it comes to saving money. First, identify whether your goals are long term or short term. Short-term goals are goals you want to accomplish in five years or less, or money you'll need to access in an emergency. A down payment for a house or car would be considered a short-term goal, as would saving for a vacation.
Long-term goals, such as funding your retirement or child's college education, are goals you plan to reach in 10 years or more. If you have long-term goals, it might make more sense to invest.
Investing can be risky, so traditional savings are encouraged for accomplishing short-term goals. If you're trying to put a down payment on a house, for example, a stock market investment could lose 10 percent or more of its value just before you need to access the funds. Saving with a bank or credit union, on the other hand, insures your money and protects it from losing value.
Saving vs. Investing
|Saving for short-term goals
- Less than five years
- Emergency fund
- Car or house down payment
|Investing for long-term goals
- More than five years
- College education
Rule of 72
Imagine you have $1,000 and decide to put it into a savings account or invest it. How long will it take to double your money? The rule of 72 will give you the answer. To apply this rule, divide 72 by the interest rate you're earning. The result is the number of years it will take you to double your investment.
Example: Suppose you're earning 8 percent interest on your $1,000 investment. To figure out how long it will take to double your money, divide 72 by 8. The result, 9, means your $1,000 will grow to $2,000 in nine years. In another nine years, that $2,000 will double to $4,000, as long as you continue to earn 8 percent interest.
Where to Save
Note: When choosing a financial institution, select one that is FDIC insured so your money is protected, even if the bank or credit union fails.
Banks and credit unions offer several savings options for accomplishing your short-term goals.
A checking account is a good way to start accumulating money. It offers the lowest interest rate of all account options but allows the most transactions. When opening a checking account, look for one with low fees or no fees at all.
If you have $100 or more, you might want to consider opening a savings account. Savings accounts generally pay higher interest rates than checking accounts but do not offer as much flexibility.
Money market accounts
With larger amounts of money, other options become available that pay more interest. Money market accounts have higher interest rates than checking or savings accounts but limit the number of times you can withdraw your money.
Certificate of deposit (CD)
If you won't need your money for six months or longer, a CD is a good option. With CDs, the longer you agree to lock away your money, the higher your interest rate will be. Most CDs require a minimum deposit (usually $250 to $1,000), pay a higher interest rate, and don't allow any deposits to or withdrawals from the account for a specified amount of time (usually six months to five years). If you take your money out early, you could be charged a penalty, usually equal to three months' interest.
Now is the best time to save for the future. Putting money away today can lead to significant rewards down the road by putting a home, car, travel and a secure retirement within reach. If, after graduation, you start putting $100 a month into an account that accrues 8 percent interest, you'll wind up with $149,036 after 30 years.
Use the link below to see how much your savings can grow over time.