Savings 411

You may think that putting money into savings, as a college student is impossible. Or maybe you don’t know how to fit saving into your budget. Increasing your income or decreasing your spending will free up funds to save, (hint - take a look at our Budgeting 101 for tips on saving on your expenses). The earlier you start saving money, the more time your money has to earn interest and grow. It may take a while to get into the habit, so start saving now!

When you put money into a savings account, your money earns interest. The bank lends the money in your account to other customers charging them a higher interest rate than the interest they are paying you.  Don’t worry your money is safe, it is insured by the federal government up to $250,000.

Thinking about saving while you’re a student may seem impossible. Start small, save a little each month to get in the habit. At many banks and credit unions, you can set up an automatic transfer of funds from checking to savings, making saving a snap.

Since the money you put in a savings account earns interest, the earlier you start the better. If you begin saving with an initial deposit of $100, and deposit $50 a month, at .15% annual interest rate, compounded monthly, in 10 years you will have $6,147.11 in savings!

The more time you give your money, the more money it makes for you.

If you are a financial aid student, stretching your aid to last throughout the semester may be challenging. Try dividing your financial aid refund by the number of months you need the money to last. Putting all but the money you need for the current month in savings can help stretch your financial aid dollars.

Savings accounts aren’t linked to debit cards, making funds in a savings account less convenient to access, potentially limiting overspending.  Each month transfer the amount you have allocated for that month into your checking account to cover monthly expenses.

Many banks and credit unions have checking and savings accounts for college students. Look for a savings account that has no monthly maintenance fee, and doesn’t require you to keep a high minimum daily balance in the account. Choose an account that has the best compound interest rate and watch your savings grow.

Compound interest is earning interest on your principal and on interest you have already earned. Interest earned on interest! The more frequently interest is paid the faster your money will grow.  Interest compounded daily will earn you more than interest compounded monthly.

A deposit of $100, with an annual interest rate (APR) of 5%, will have grown to $105 at the end of the first year. The second year you would earn interest on your initial $100 deposit plus the $5 you earned in interest, or $105, etc., etc. At the end of ten years, you would have $162.89 in your account.

While that may not seem like much, if your initial deposit was $5,000, at the end of the first year it would have grown to $5,255.81, by the end of the second year you would have a total of  $5524.71.

Maximize your savings by choosing a savings account that compounds interest at frequent intervals, to watch your balance grow….just for leaving it in the account!

Paying yourself first means that you treat saving as an important monthly expense and “pay” your savings account at the beginning of the month, as though it were a regular bill, just like rent and utilities.

While you may be tempted to wait until the end of the month to transfer any leftover money to savings, often by the time the end of the month rolls around, there is no money left to save!

The sooner you get in the habit of regularly putting money aside in a savings account, the more your money will work for you by earning interest.

Growing your savings by paying yourself first, will help you to avoid a financial setback when unexpected expenses occur, enable you to reach your goals - reducing financial stress!

The rule of 72 is a shortcut used to estimate the amount of time it will take to double your money at a particular annual rate of return, or interest rate, by dividing 72 by the interest rate.

If your account is earning 3% interest, it will take you 24 years to double your investment.

72 ÷ 3 = 24 years

If your account is earning 6% interest, your investment will double in approximately 12 years.

72 ÷ 6 = 12 years

While saving and investing both have the potential to make your money grow, they are vastly different. Saving is putting money aside in a federally insured, interest-bearing account, to grow. While you may earn less interest in a savings account, your money is both safe and easily accessible.

Investing is putting funds toward purchasing an asset that has the potential to make money over time. While investing may yield higher profits, it also has the potential to lose money, making it riskier than a savings account.  Investments may have restrictions on withdrawals, making your funds less accessible if you need cash in a hurry.

Saving should always come first. A general rule of thumb is to have a minimum of three months’ worth of cash in savings to cover living expenses, in case of emergency.