Empower Yourself by SavingHigh prices and economic uncertainty continue to be top of mind for many people in 2023. There is promising news to hold onto, though: Following the record inflation of 2022, Consumer Price Index data indicates that inflation is slowing this year. If that slowdown continues, we may see some price stabilization - some economic certainty - coming soon.
In the meantime, it's good to know that we have a tool at our disposal to help us take charge of our own finances and position ourselves for success. Saving empowers us by keeping our focus on our financial goals and providing a financial cushion in case we need it.
The importance of saving moneyIf you've ever had to wonder where you're going to get the money to cover unexpected medical costs or car repairs, home renovations or this year's vacation, then you already know how important savings can be. The money you save can serve as a safety net as well as a means to buy what you need or want. Here are some good reasons to save:
Peace of mind - The knowledge that you have money in the bank when you need it can provide a greater sense of security and financial freedom. You can decide to buy or experience something without being concerned about how you'll pay for it. You can stop worrying as much about the day-to-day expenses. In short, savings can help you spend less time stressed out about money.
A brighter future - Saving is essential to achieving life goals like buying a home, financing your children's education or living the life you always envisioned during your retirement. Building healthy saving habits now will serve you for the rest of your life.
Emergencies and other unexpected expenses - Many experts recommend tucking away at least three to six months' worth of living expenses "just in case." This emergency fund will be there for those moments you didn't see coming: You unexpectedly lose your job, your furnace or AC tanks, or you otherwise need to come up with a handful of cash in hurry.
Short-term goals - When you save for big purchases — a vacation, a car, new electronic devices — you can buy them outright rather than taking on debt, which may cost you more in the long run. Adopting a strategy of achieving your short-term financial goals through saving is smart.
Wealth-building - When you put money into an interest-bearing savings, checking account or a certificate of deposit (CD), it earns interest, which can help your money grow over time. We'll look next at how interest works to help your savings grow.
How interest boosts your savingsCustomers who deposit money into a bank account help enable that financial institution to make investments and lend money to other customers. In return, the bank pays those depositors interest, provided their accounts are designated as interest-bearing. They may pay interest monthly, quarterly or at some other frequency. They also may compound the interest, meaning they pay interest not only on the funds you've deposited, but also on the interest you've previously earned.
These basic definitions, as well as examples, help illustrate how interest can help your money grow:
Simple interest is interest paid on the funds you've deposited (your principal). It is calculated as a percentage of that principal. For example, if you were to deposit $10,000 into an interest-bearing account paying 3% annual interest, you would earn $300 a year in interest.
Compound interest is also calculated as a percentage, but that percentage is applied to not only the principal but also any interest that has accumulated in the account. Using the same example, your $10,000 account would earn $300 in interest the first year, but in subsequent years, the interest would be recalculated to include any interest you've earned to date:
Year 1 - .03 x 10,000 = $300.00 interest
Year 2 - .03 x 10,300 = $309.00 interest
Year 3 - .03 x 10,609 = $318.27 interest
... and so on
In the compound interest scenario, you would have earned $927.27 over three years, and that's assuming you didn't add anything to the principal over those years. Interest could help your savings grow even more if you were making regular monthly deposits to build your account balance.
Note: For the sake of simplicity, this example is based on an assumption of annual compounding. Banks may compound more frequently - daily, monthly or semiannually, for example – which would result in slightly different figures.
Annual percentage yield (APY) is one more helpful term. It represents the actual percentage your account is paid in a year, adding the effects of compounding to the interest-earned calculation. It helps you better anticipate what your account will earn and can be a valuable tool as you compare savings products from one bank to another, especially since they may compound at a different frequency.
Get in the savings habit!Ready to start saving more? Commit to making regular monthly deposits by including your savings goals in your budget. Then make saving easy on yourself by setting up automatic deposits to your savings accounts. This habit of paying yourself first removes the temptation to spend that money and keeps you on track to your financial goals.
Visit your local Dollar Bank office or call us at 1-800-242-2265 to talk with one of our banking experts about developing a savings plan to help you reach your financial goals.
This article is for general information purposes only and is not intended to provide legal, tax, accounting or financial advice. Any reliance on the information herein is solely and exclusively at your own risk and you are urged to do your own independent research. To the extent information herein references an outside resource or Internet site, Dollar Bank is not responsible for information, products or services obtained from outside sources and Dollar Bank will not be liable for any damages that may result from your access to outside resources. As always, please consult your own counsel, accountant, or other advisor regarding your specific situation.
Posted: May 25, 2023