A large number of people find that once their income increases, they have no use for the extra money. While in some cases they may spend it on expensive creature comforts and premium devices, finding the best way to make the most of their increased income can be difficult. When an individual earns more money, the financial temptations that he must resist grow in number. This having been said, the best way to store your excess money also makes it difficult to access it when you want to buy something on a whim.
Most banks and private lenders offer savings account deals to individuals, regardless of their income level or the amount of money that they want to deposit. Generally speaking, savings accounts are much more affordable to open and maintain than other types of accounts and some banks may even provide this service for free, provided that the client contributes to the account at least once a month.
Savings Account Make Your Money Work for You
The most attractive aspect of storing one’s money in a savings account is the fact that the bank attaches an interest rate to it. In other words, for every month that the account is open and contains any amount of money, the bank will pay interest to the client.
Keep in mind that the interest rates offered usually seem small, especially when compared to the ones that borrowers have to pay to lenders when they take out a loan. However, savings accounts are long-term commitments and can be extremely profitable in the long run. This is because of how compound interest works.
“Compound interest” refers to a simple financial concept that is best explained through an example. If an individual opens a savings account with a 1% interest rate and deposits £1,000 in it, the bank will pay him £10 after the year has passed. If the account owner does not withdraw the money or deposit any more during the following year, the bank will have to pay interest yet again, after 12 months. However, this time, the interest rate will be 1% out of £1,010, which means that the account owner will get £10.1.
The compound interest may not seem like much, especially if the account owner deposits a small amount of money, however, those who contribute to it regularly will find that the increase in value can be substantial.
By opening the account with £1,000 and then depositing £200-£300 every month, the compound interest will be increased with each transfer.
This having been said, please keep in mind that the 1% interest rate presented above was only for the sake of our example. Banks may offer more or less, depending on what saving accounts deals they have.
It Makes It Difficult to Access the Money on a Whim
Depositing your money in a savings account also takes the temptation to spend it out of the equation. First of all, there will be an incentive to constantly deposit money into the account and get a larger compound interest value.
However, there is also the fact that savings accounts do not come with debit cards, which means that the only way to access the money is by physically going to the bank and withdrawing it. This can make it difficult to use a savings account to pay for online purchases or unplanned, inessential expenses.
Please keep in mind that savings accounts are also great to have during times of financial recession. Having a large financial buffer that you can use if your income is ever reduced can be important. As a bonus, having a savings account and contributing to it regularly can also boost one’s credit score.