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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%. The majority of the highest interest savings accounts are online savings accounts, such as ING and PayPal.
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. By the end of the second year, you will have earned more than $800 - just for 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 requiring you to work overtime or take a second job.
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 a rate that corresponds to an increase in prices and a decrease in the value of the dollar. 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. PayPal provides one of the most competitive money market accounts currently available online. A CD - or certificate of deposit - is a more stable high interest account that is also available through many online savings programs, such as ING. When you invest in a CD, you elect to put your money into the account for a set period of time, such as six months. During that time, your money will grow at the agreed interest rate. However, there may be penalties if you wish to remove your money before the period of time has expired.
Before investing in a high interest account, be sure to do your own research into the legitimacy of the account by reviewing claims filed with the Better Business Bureau and performing a simple online review search. Once you're comfortable with your selection of accounts, start putting that money away to watch it grow!
Richard Greenwood is a consumer finance expert and head of The Click 4 Group who run a number of financial comparison sites comparing savings account products from leading banks including Bankwest savings.
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