Starting a Savings Account
If you're like most Americans, saving money isn't a big part of your monthly budget. But it should be.
Think about it: having money set aside means you'll be ready if an emergency hits, and you can probably then avoid having filing for bankruptcy again. Plus, if you don't want to work forever, your savings will help you live comfortably in retirement.
Think you can't save? Think again. Many people use one or more of the following excuses to defend their choice not to save money:
- I always have something more important to do with my money than save it.
- I'm young – I've got plenty of time to save!
- I have no idea how to save money.
- I have to pay off my debts before I can even think about saving.
- I don't have enough money to save a significant amount.
But here's the truth: saving money is easier than you might think, and you don't have to be a millionaire to do it effectively.
To get an idea of what you need to do to jumpstart your savings account, you need to understand compound interest and how saving works.
The Magic of Compound Interest
Simply put, compound interest is interest you earn on interest. In other words, when you put money in a savings account, the bank or credit union will pay you a certain interest rate on that money. Say you start with $20 and earn 6% interest a year; after the first year, you'll have $21.20, because you'll have earned $1.20 in interest on your $20.
The second year, though, you'll earn $1.27, because you'll earn interest on your original amount PLUS the interest you earned. So, compound interest is "magical" because it allows you to make money without doing anything at all.
Compound interest becomes much more significant when you increase your principal (put more money in your savings account) on a regular basis.
How to Save Money
That's all well and good, you may think, but where will I get the initial money to put in a savings account?
Luckily, it may be easier than you think.
Remember when you listed all your expenses to determine where all your money goes? Hopefully, when you created your budget, you found areas to cut back. Money you save by making those cutbacks can be plopped into your savings account.
For example, if you play the lottery every week in hopes of winning big, you're essentially throwing money out the window – many experts argue that you're more likely to be hit by lightning than win the lotto. But imagine if you put your lottery money every month into a savings account--let's say you drop $20 a week on lottery games.
If you put that money instead into a savings account with 4% interest compounded annually and left it alone for 18 years, you'd have more than $27,000.
Just as a series of small, insignificant purchases can add up to a large chunk of spending each month, so can a series of small deposits add up to a hefty amount of savings.
Forced Savings
Some people find themselves almost incapable of voluntarily socking away money for a rainy day. If you consider yourself one of these, you can still save, thanks to what's known as "forced savings".
Programs like employer-sponsored retirement funds and college savings programs allow you to set aside money out of each paycheck tax-free to use for your retirement or your children's educations.
Even if you're self-employed or unemployed, the government has options for you to save money for when you're ready to stop working for good.
If you're making mortgage payments on a home, you're also engaging in a kind of forced savings.
Over time, home values almost always increase, so as you get more and more equity in your house, you're building up an important asset that may be the strongest "savings account" you ever have.
And, if you want to shorten the time until you own your home free and clear and reduce the total amount of interest you pay over the life of the loan, you can opt to pay extra principal each month.
All you have to do is make monthly payments slightly larger than what's due – over time, you'll reduce the total amount of payments you have to make and therefore the total amount of interest you pay on your loan.
Start Saving and Save Often
At the end of the day, the most important thing to remember about saving money is simply to do it. Start saving now and keep saving, even if you don't think you're making much of a difference. Over time, your contributions will add up. Just wait and see.
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The above summary is not legal advice. Laws may have changed since our last update. For the latest information on bankruptcy laws, speak to a local bankruptcy lawyer in your state.