One of the biggest advantages of actually saving money is you are going to get paid by someone to hold onto that money for you! Woohoo free money!
As you first get started it won’t be much. Especially in regards to the emergency fund. Actually, after accounting for inflation, it may be slightly negative (depressing, I know).
Returns on having money in the bank is a great thing and awesome feeling but you need to make sure it isn’t your main focus, especially if you are just establishing your savings. The reason? Basically, it doesn’t really matter. When you don’t have much capital, the difference that a better interest rate will make pales in comparison to the difference that your saving rate will make.
Saving rate is the amount of money you are contributing to your savings account(s) each month. Interest rate is the percentage your account is earning in interest. Unless you have amassed some serious cash already you need to focus on saving rate and not worry so much about the interest rate.
That said, if two account are in all ways equal, with one earning .01% and another earning 1.00%, of course opt for the higher interest rate. But don’t procrastinate or stress yourself over your rate of return just yet. Focus on your budget, and diverting more money from it to your future.
Basically: An average saver will do better than a great investor who doesn’t save as much.
To illustrate let’s consider two savers over ten years. Big Saver puts away $250.00 a month earning a modest return of 5%.
Little Saver puts away only $150.00 a month but manages to earn a healthy return of 10%.
Big saver will end up with $38,822.22.
Little Saver ends up with $30,729.45 despite earning double the rate of return.
To put it in perspective, Big Saver would have ended up with $51,213.95 if they could match the 10% rate of return Little Saver earned. That’s the difference every $100/month can make, especially when just starting out on your saving career.
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