Savings Options

-Sigombak-
The magic of compounding. If you could save just one dollar a day—less than the price of a cup of coffee in most convenience stores—and invest this money at 4 percent, compounded daily, here’s how it would grow:

The effects of compound interest are far more dramatic when your investments earn higher rates of return. The Rule of 72 is a useful tool to show how the rate of return affects investments. You can find out approximately how long it will take for your money to double by simply dividing 72 by the rate of return. For instance, at 6 percent, it will take 12 years to double your money (72 divided by 6 is 12 years). At 10 percent, your money may double in a little over 7 years.*

*Please keep in mind that this is just a rule of thumb. The Rule of 72 is based on a hypothetical illustration and does not represent performance of any specific product and therefore there is no assurance that investments would double within a specific time frame.

Savings vehicles tend to be lower-risk/lower-return options. Following is a quick guide to the most common savings vehicles:

Savings Accounts are a good place to store emergency funds and savings for short-term financial goals. Funds are readily accessible, and the Federal Deposit Insurance Corporation (FDIC) generally insures savings accounts up to $100,000. Their chief drawback is that interest rates tend to be low. The interest rate paid on a savings account is often less than the rate of inflation, so your money will not grow as fast as the rising price of goods and services. For this reason, savings accounts are usually inadequate to meet long-term goals.

Money Market Accounts are similar to savings accounts, but usually earn slightly higher interest and still allow easy access to your money. Some banks and financial institutions require an initial deposit of $1,000 or more and limit the number of withdrawals you can make during a given period of time. Bank money market accounts may also be FDIC insured up to $100,000. Money market mutual funds are issued by other financial institutions (e.g., stock brokerages) and are not FDIC insured and may lose value.

Certificates of Deposit (CDs) are generally FDIC-insured, and usually earn more interest than savings accounts with equally little risk, but with less liquidity. CDs provide higher interest rates in exchange for the agreement to keep your money in the CD for a fixed period of time, usually three months to five years. In general, longer term CDs have higher interest rates. Note that there is usually an interest penalty for taking money out before the end of the agreed-upon time period.