By: Richard Greenwood
No matter how much money you earn, it is important to think about saving money faster through a high interest savings account. Statistically, the money that you save will grow substantially larger if you store it in a high interest savings account than if you simply stored it away in a no-interest checking or savings account. A high interest savings account generally yields an interest rate greater than 2.5%. Most of the high interest products offering the most competitive interest rates and online savings accounts such as HSBC and ING Direct. Why Interest Matters Larger capital growth occurs with a high interest savings account because you will receive interest on the principle amount of money that you put away into a savings account. The principle, combined with the interest that you earn on that principle, continues to build on itself - with little-to-no maintenance on your part. For example, if you put away $10,000 into a high interest savings account, such as an online savings account, with an annual interest rate of 4.0%, you will have accrued $400 by the end of the year without having to lift a finger. At the end of year two you would have earned over $800 just by keeping your money in the high interest account. The passive income that you receive from your high interest account can help you achieve financial security and build your nest egg ... without the need for you to take up another job or working all the overtime you can get. Rate of Inflation While earning passive income from your savings seems like a strategic way to, basically, earn money for doing nothing, keep in mind that there is a national rate of inflation, which is usually about 3% per year. The rate of inflation is based upon the average increase in prices which therefore causes the real value of the dollar to fall. Therefore, if your money is tied into a high interest account that returns 4% interest a year, you have to subtract this rate of inflation in order to understand exactly how much your money is actually growing. Types of High Interest Accounts There are two popular types of high interest accounts that you may want to consider: money market accounts and CDs. A money market account is directly linked to the Stock Market and is not guaranteed. As the market falls, so can your interest rate. However, because it is tied to the Stock Market, you can also lose your principle when you invest it into a money market. Currently PayPal is offering one of the highest interest and easy access money market accounts online. A certificate of deposit (or CD for short) is a very stable high interest account with a fixed term and return. It is often available through online savings banks such as ING. When you put your money into a CDD you have to decide an initial period of time for the investment such as twelve months. During the agreed period your funds will grow according to the interest rate agreed. However, there may be penalties if you wish to remove your money before the period of time has expired. There are a number of new online banks entering the market with names that may not be familiar to you so be sure to check out the company before handing over any money. One of the easiest methods is to do a search on the Better Business Bureau website and look for any claims filed against the company. Once you're comfortable with your selection of accounts, start putting that money away to watch it grow!
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To find out how much your could earn - use our savings calculator to show how much your interest will grow over time. Richard Greenwood is director of the Click 4 Group which runs a number of websites to compare high interest savings and banking products from leading banks.
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