Get the Right Tools to Build Savings

Take advantage of tools that help your money grow

If you only keep your money in a spending account or a piggy bank, you’d only ever have the money that you earn.

But by using saving and investment tools, the money you earn can grow on its own over time. That’s how you make your money work for you. You put it into places where it can grow and create wealth for you.

Understanding interest

Earlier in this lesson, we introduced APY or annual percentage yield. You earn interest on the money you save, which helps your money grow.

Here’s how APY works:

1. Different savings tools offer different APY.
2. The higher rate is, the faster your money can grow.
3. That interest compounds, which means the money you earn gets rolled into your balance.
   1. Interest can compound daily, monthly, or yearly.
   2. The faster it compounds, the faster your money grows.
4. That way, the next time interest gets added (it accrues) you will earn on the balance, INCLUDING your previous earnings.

For most savings accounts, interest compounds daily but it gets paid out once per month. But again, since savings accounts have such low APY, the growth is tiny.

Smart Money Tip: Go for growth

You always want to aim to use tools that give your money better growth. A savings account is fine to start with, but you want to move your money into tools that offer better growth.

It’s important to note that tools that offer higher APY often come with requirements. But if you can meet those requirements, your money will grow faster.

For example, some savings accounts offer 2% APY, but they may require you to maintain a balance of $1,000.

If you were to keep that $1,000 in a normal savings account at 0.01% APY, it only earns about 10 cents per year. But if it’s in an account at 2% APY, then it would earn about $20 per year

This is why you always want to aim for tools that offer higher APY, so your money can grow faster.

Other tools for saving

There are better ways to save money than a basic savings accounts. Here is a quick look at some other tools that can help your money grow faster:

• Money Market Accounts are like super-charged savings accounts.
  • They offer better APY.
  • That APY is variable, meaning in a good economy it’s higher and your money grows even faster.
  • They also offer tiered APY, so the more money you have in your account, the higher the APY will be.
  • The catch is that they usually have requirements, like a minimum deposit amount to open the account and a minimum balance requirement.
  • But you can deposit and withdraw your money anytime you want.
• Certificates of Deposit (CDs) are an investment tool you get through your bank.
  • You deposit a set amount of money one time, so there are no extra deposits.
  • The CD will have a set APY that compounds daily or monthly.
  • But you must leave the money there for a set period, usually one month to up to five years.
  • After that period, your CD matures and you can get the money you deposited plus the interest it earned.
  • You can also choose the roll a CD over, meaning it continues to grow over another set period.
• Bonds are an investment tool you can purchase through the government or a private company.
  • Bonds have a set APY and set period to mature, known as the term.
  • The terms on bonds are longer than those on CDs, usually from one to 30 years.
  • You receive interest earnings from the bond before it matures.
  • At the end of the term, you can roll the bond over or cash out to get the money you used to purchase the bond back.
• Stocks are an investment tool you purchase from publicly traded companies.
  • You purchase a share in the company, which represents a tiny percentage of ownership in that company.
  • When the company does well and earns profits, the value of your stock increases.
  • So, if you sell the stock when the value is higher, you make a profit.
  • Some stocks also pay dividends, which means you get money each year when the company does well. 
  • Stocks can help your money grow much faster than other tools. However, they also have a higher risk because you can lose your money if the company does poorly.

Smart Money Tip: Start learning about investing

The earlier you start learning about and using all the tools we just introduced, the better!

Investing is probably one of the most complicated subjects to learn about in finance. Lots of adults are intimated by it so they don’t ever start investing. But that’s not good!

Instead, you want to learn about investments while you’re young. When you’re young, you can try things like stocks out because you have time to take risks and possibly make mistakes. And that’s OK!

There are even apps that will take the money you save and help you invest it in stocks. That way, you can learn about the stock market with little money to start out and relatively low risk.

The important thing is to start investing so you learn how to do it. That way, when you’re older you’ll be comfortable investing and can build wealth.