Financial Services, Resources, Solutions

It's Child's play!  You've figured out that money doesn't fall from the sky or grow on trees. It sure doesn't just show up in your pocket. You probably earn spending money by holding a job—you know what hard work is.

Why not make your money work for you? It can. Compare these three ways of managing your money:

1. You do all the work

You save your spare change, say a dollar a day, for 10 years in a jar in your room. Add up your savings to reveal how much you will save $3650(your account balance) that way.

Yes, simply saving money—that is, just not spending it—really adds up.

But your money isn't working for you yet.

2. Weekly investments work

Collect your spare change every day in a box or jar.

Then, take $7 out once a week and invest it in an account at your annuity. $4069 (Have fun with the rest!)

This is called a periodic investment. Assume the interest rates stay fixed at 2.2%.

3. One-time investments work

Let's say you receive $3,650 at your graduation party (of course!) You put it in a annuity savings account. This is called a lump-sum investment.

Assume the interest rates stay fixed at 2.2%.

Add to reveal the total amount of money you'll have in your account at the end of 10 years. $4547

What causes such a difference in earnings?

Compound interest is your friend

The money you put in your annuity account has worked for you. That's because your annuity pays you interest.

When you leave your money in your account, you earn interest on the interest, as well on the original amount. That's called compound interest.

In this example, the earnings from periodic investments are about half the earnings from one lump-sum investment. That's because:

• The periodic investments ($7/week) earn interest on small amounts that slowly get larger;
• The lump-sum investment ($3,650) earns interest on a large amount right from the start.

Over 10 years, there is more interest to earn interest on!

What's the compounding period?

Different accounts have different compounding periods—the time that goes by before they pay the interest. They can be daily, monthly, quarterly, or annually.

The more frequent the compounding periods, the faster the money in your account grows.

The reasoning is simple: if today's interest earnings start earning interest tomorrow, you're going to make more in the long run than you would if today's interest earnings don't start earning more interest until next month.

The Rule of 72

Here's something interesting: Ask your friends to name an amount of money. Now tell them how long it will take to double it.

Do this using the Rule of 72 to estimate how time and interest work to double any amount of money.

Important: The Rule of 72 assumes you leave the money in an account without taking away from it or adding to it. It isn't exact, but it's close enough. Here's how it works:

• Divide 72 by the interest rate you expect to earn. This will show the number of years it will take to double your money. For example, if your annuity savings account earns 3% interest, use this formula this way:

• Or, divide 72 by the number of years in which you want your money to double to figure the interest rate you'll need. For example, if you want your money to double in 10 years, use the formula this way to learn what interest rate you'll need to earn:

Interest rates make a difference

You probably won't find anyone giving 7.2% interest on a simple savings account. Interest rates are pretty low right now. But that doesn't mean you have to settle for the lowest rate.

Ask your advisor if they have a builder program. These accounts can be started with as little as $100, and can be added to on a regular basis. The interest rate is a little better than that of an ordinary savings account.

Or try this:

Invest small amounts on a regular basis into your annuity. When you accumulate enough, ask your agent to show you how to transfer your money to an account that gives more interest.

More Easy Ways to Save

 

Make savings fun. If you're having trouble sticking with your plan, try one or more of these tips:

• At the end of the day, empty your pocket and wallet change into a bowl or container by your bed. After a week, put your money in your annuity savings account.
• Bump it up a level: anytime you buy something, pay for it with paper money only. Don't spend the change. Instead, at the end of the day put all your change in that container next to your bed.
• Give yourself a limit that you can spend each week. Once it's spent, that's it. This prevents you from digging into your savings and spending money on unimportant things.
• Decide how much you can spend on entertainment, clothes, gifts, etc, each week. Label an envelope for each category. Divide your weekly spending money into each envelope. Once you spend what's in the envelopes that week, you're finished 'til next week!
• Ask your parents if they'll reward you by adding $5 to your account every time you save $50.

Start today!

Put your money to work now in your annuity savings account. Here's one way to save: pack one or two lunches a week, instead of eating out every day.

 

Compound Interest Calculator
How interest is calculated can greatly affect your savings. This calculator demonstrates how compounding can affect your savings, and how interest on your interest can really add up!