If the thought of having enough extra money each month to put in savings makes your head spin, it may be time to look at savings in a different way. Did you know that the length of time you allow your savings to grow can have just as big of an impact as the amount you save? What that means is that even saving a little amount can work out as a huge advantage in the end. Let’s examine it closer.
Compound Interest is the Key
When you set up a savings account, you will ideally pick one that offers a decent interest rate. Now this interest rate may not seem like much, but what makes the real difference is the compound interest. As experts explain, the key to building your savings is consistent investing over a long period of time thanks to compound interest.
Compound interest is the interest that is calculated on the original principal in your account, as well as the interest on any new deposits you make. An easier way to describe it is interest on interest. So not only are you benefiting from the interest on that initial deposit, each time you make subsequent deposits (regardless of the amount), the interest will continue to build.
To give you a better idea of how quickly this compound interest grows in your account you can make use of the online interest rate calculator on the Bankrate website. This calculator will require the initial starting balance of your savings and then the length of time you plan on letting it sit there and build interest. It will then show you how much you will make by the end, even without any further deposits.
Aim for 10% Whenever Possible
Now as for how much you should be aiming to save, this is a number that will differ for each person. Obviously it depends on your current finances and financial commitments, but ideally you want to aim for 10% of your income each month.
The reason experts suggest aiming for 10% is because it isn’t a massive goal, most people can put away this amount by making small changes and cuts in their life, and it’s also enough money that will start to make a difference over time. Think about how quickly that compound interest will start to grow. Within a couple of years of saving 10% each month, you’ll suddenly have a real nice chunk of change saved.
As your finances change over the years you can always save a little less or a little more, but try to keep up with the habit of savings.
Let the Interest Do the Work for You
It’s important that when you think about saving, you don’t get too caught up in the amount, rather you focus on the consistency of it. The more consistent you are with making deposits to your savings account, the more that compound interest will grow and work for you.