The savings accounts on many platforms can be a very profitable one in that it is capable of bringing in interest. Interest is payment from a borrower or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate. Interest differs from profit, in that interest is received by a lender, whereas profit is received by the owner of an asset, investment or enterprise. The rate of interest is equal to the interest amount paid or received over a particular period divided by the principal sum borrowed or lent (usually expressed as a percentage).
5 Importance of Getting Interest on Your Savings
Here are the 5 importance of getting interest on your savings:
1. Compound growth Can Give Your Savings a Big Boost
When you invest your money, you stand to benefit from compound growth, which is similar to compound interest. With compound interest, you’re essentially earning interest on interest – you earn interest on your original and following investment contributions, plus on all the interest that has built up over time. This gives you a larger balance to earn future interest on, leading to even bigger returns. To help you understand the value of compounding, consider the money you’d have without the 6% compound growth: just $240,000, or about a quarter of the amount stated above. When you’re young, your investing options are long term, and may include segregated funds, mutual funds held inside TFSAs and RRSPs. Overall, compound growth represents the key difference between investing your money through a financial institution and shoving it in a shoe box under your bed. It’s what can help your money grow – in some cases, far beyond the amount you originally invested.
2. It Pays to Be Prepared
It’s always a good idea to be prepared. You just never know when something will come along to change your financial outlook. From an unexpected career change to last-minute vacation opportunities, life’s all about surprises. Putting money aside can help you handle these little emergencies without having to significantly change your financial plans. But being prepared isn’t just about putting money into a savings account – it could also mean protecting your family through life insurance, critical illness insurance or disability insurance.
3. You Can Weather Unexpected Market Events
Even cautious investors can be affected by market downturns, which is another reason it’s so important to save early. It means that if the markets take a downturn, you have time to make up for it. On the other hand, if a market change hurts you while you’re scrambling to save for retirement, it can be a lot harder to recover. To put this in perspective, imagine setting aside a large percentage of your income for retirement while also trying to meet responsibilities associated with a mortgage, a child’s post-secondary tuition, car loans, etc. Additionally, investing smaller amounts over longer periods of time allows you to take advantage of dollar-cost averaging. Under this approach, you balance the highs and lows of the market by buying units at consistent intervals, rather than going all in when prices may be high.
4. You’ll Want to do More than Just ‘get by’ in Retirement
Let’s face it, the last thing you want to do in your retirement is wonder ‘will I have enough?’ If you’re like most Canadians, you’ll want the chance to travel, spend time with family near and far and buy big-ticket items, like a boat or cottage. You may also want to help your children or grandchildren pay for their post-secondary education (such as through a registered education savings plan) and start their own families. By starting to save early, you’ll give yourself a better chance of reaching these financial goals.
5. You’re Setting a Good Example
By the time they’re in their late 20s or early 30s, many Canadians are parents to young children. And one of the best lessons young parents can give to their children is sensible financial management. In short, by being good with your money at a young age, you can help your children understand the value of getting an early start on saving and being organized when it comes to managing finances.
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