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How to grow your savings fast

August 06, 2007

Got some cash parked inside a conventional savings or checking account? Chances are it’s earning very little interest. But maybe you don’t want to lock the funds away inside a CD or have to worry about potential stock market fluctuations. So what should you do?

There are three steps you can take right away to make your savings grow fast:

Step 1: Choose a high-yield savings account
The extremely low interest rates offered by conventional bank accounts often don’t keep pace with inflation. That means even if your balance grows slightly, your buying power can shrink. But the good news is that many banks now offer no-fee, Web-based high-yield savings accounts with interest rates many times greater than conventional savings accounts.

Assume you have $10,000 in a savings account that pays only 0.5 percent interest. At that rate, after ten years, your balance will grow to only $10,511. But if you placed the same amount of money inside a high-yield savings account that paid 5 percent interest, it would grow to $16,289.

Furthermore, over the past decade inflation has averaged 2.5 percent. If inflation were to continue at this rate, your money would need to earn more than 2.5 percent just to keep pace. Money left sitting in an account earning only 0.5 percent would actually decrease in terms of its real-value buying-power.

Step 2: Contribute regularly
The best way to save money is to tuck a little away every month. But the problem with planning to regularly transfer any extra money you have after your monthly bills are paid into a savings account is that it takes extraordinary discipline. It’s easy to spend that extra money and have nothing left at the end of the month.

A better way to save money is to set up an automatic transfer of a specific amount from your regular bank account to a Web-based, high-yield savings account once or twice a month, preferably on payday. These automatic contributions are easy to set up and can prevent you from being tempted to spend the money.

If you transferred $300 a month into an account earning 5 percent interest, it would grow to just under $3,700 in just one year. Keep it up for ten years and you’ll be sitting on a nest egg of almost $47,000.

Step 3: Start contributing now
The earlier you begin to save, the more you will be able to take advantage of the power of compound interest. Let’s say you have $2,000 in a high-interest savings account that pays 5 percent. In your first year, you’ll earn $100 in interest. Next year, you’ll not only earn another $100 on the original $2,000, but you’ll also earn an additional $5 on the previous year’s interest. Over the course of many years, that compound interest pays huge returns.

Here’s an example: Ali and Maria both open high-yield savings accounts that pay 5 percent interest. Ali contributes $200 a month beginning when he is 30 years old. Maria starts at age 40 and, to make up for lost time, she sets aside $280 each month. By the time they reach age 65, both will have contributed exactly the same amount. However, Ali’s balance will be almost $228,000, while Maria’s would be less than $168,000. By starting ten years earlier, Ali will earn an extra $60,000 for his retirement.

Check with a qualified financial adviser to see which investment and savings products are best for you.

 

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