“Saving must become a priority, not just a thought. Pay yourself first.” – Dave Ramsey
Table of Contents:
- Introduction: Saving Money
- Compound Interest
- Federal Funds Rate
- Saving Money with the Highest Rates
- Certificate of Deposit Rates
Introduction: Saving Money
Money Cat Finance believes that the most important thing in personal finance is, saving money!
The rule of thumb is to have an emergency savings in cash that will cover 6-12 months worth of expenses. Very few people actually achieve this and you need to be determined not to touch your savings at times of want and not need.
Compound Interest
The effect that compound interest has over time can also help you reach your goals. Compound interest means that the interest that you earn on your money also earns interest. Essentially, you are re-investing the interest that you earn. In the next period, you earn interest on the initial sum AND interest on the interest earned. Here’s an example of how compounding can increase your earning potential over a series of 5 years at 5% APY (Annual percentage yield):
- 1st Year: $10,000 initial deposit
- 2nd Year: $10,500 (initial deposit plus 5%)
- 3rd year: $11,025 ($10,000 initial deposit × .05 = $500, + $500 in year 2 interest × .05 = $25)
- 4th Year: $11,576.25
- 5th year: $12,155.06
A faster rate of compounding (monthly, daily or even continuous) will increase this yield a bit more. But, this amount is less significant. Saving money becomes magnified with a higher interest rate!
In the United States, there are exactly 4,983 different banks with varying interest rates (as of April 2021). The current interest rate is dependent on multiple factors, but it is largely dependent on the federal funds rate.
Federal Funds Rate
The interest rate for savings accounts that you will find at various banks is largely influenced by the federal funds rate that is set by the Federal Reserve. The Federal Reserve looks at a large set of data to determine if they need to raise or lower the federal funds rate. The 2 biggest factors are unemployment and inflation. Click the following tabs to view the historical data:
The interest rate that the borrowing bank pays to the lending bank to borrow the funds is negotiated between the two banks, and the weighted average of this rate across all such transactions is the federal funds effective rate. (Wikipedia)
The federal funds target rate is determined by a meeting of the members of the Federal Open Market Committee which normally occurs eight times a year about seven weeks apart. The committee may also hold additional meetings and implement target rate changes outside of its normal schedule. (Wikipedia)
If the unemployment rate goes up, the federal reserve usually lowers interest rates to stimulate economic growth. Think of this as the federal reserve’s gas pedal.
If the economy runs too hot, inflation usually ticks up. The federal reserve raises interest rates to curb inflation. Think of this as the federal reserve’s brake pedal.
Saving Money with the Highest Rates
Looking for a place to park that emergency savings? Try a high yield savings account that is FDIC or NCUA insured. This insurance means that if the bank or credit union goes out of business, the U.S. government insures that you will not lose your money. Here are some great options for high yield:
Check back soon for some great rates!
Certificate of Deposit Rates
Looking for a little bit higher yield that is also FDIC or NCUA insured? Go with a certificate of deposit (CD). Here are some great options for high yield:
Check back soon for some great rates!