A savings account is an important way to prepare for big expenses and future goals — even if you start small.
The sooner you start saving, the sooner you can earn interest, money paid over time to your account by the financial institution just for depositing your funds.
Here’s a look at the potential annual earnings of three different savings balances and what you could do with the interest you accrue.
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The national average interest rate for savings is 0.45%, but many national banks pay only 0.01% annual percentage yield (the amount of interest an account earns in a year). If you deposit $100 in one of those savings accounts, you’ll end up with one penny in interest after a year.The best high-yield savings accounts pay around 5% APY right now. After a year, you’d earn more than $5 in interest on your $100.
What your interest can buy: One cent is not enough money to buy much of anything. But putting your money in a high-yield savings account could leave you enough for a coffee.
A balance of $100 doesn’t earn you much interest either way, but the benefit of using the account with a higher APY is clear: It pays much more than a regular savings account.
If you’re able to put away a bigger chunk of money, you’ll earn more interest. Save $1,000 for a year at 0.01% APY, and you’ll end up with $1,000.10. If you put the same $1,000 in a high-yield savings account that pays 5% APY, you could earn about $50 after a year.
What your interest can buy: Ten cents is enough to buy a stick of gum — but $50 will buy a date night meal for two or some shares of stock in certain Fortune 500 companies.
How much interest can you earn on $10,000?
In a savings account earning 0.01%, your balance after a year would be $10,001. Put that $10,000 in a high-yield savings account that earns 5% APY for the same amount of time, and you’ll earn about $500.
What your interest can buy: A dollar is enough to buy a soda — but $500 would get you a new TV or kitchen gadget.
Saving whatever you can as soon as you can is best. Instead of waiting for a raise at work or an inheritance, it’s more important (and realistic) to begin building a savings habit as soon as possible.
You can start with whatever you can afford; many savings accounts don’t have a minimum opening deposit requirement.
The sooner you earn interest, the sooner you’ll be able to build on it, thanks to compounding. Compound interest works this way: When interest is calculated and added to your account, the larger balance then earns more interest.
Here’s an example: Say you save $1,000 for a year in an account that pays 5% APY, compounded annually. After 12 months, you’ll have $1,050. Then you’ll start earning interest on $1,050, so after the second year you’ll have about $1,100.
Just as important as saving sooner rather than later is choosing the right savings account. Interest rates at online banks are strong across the board right now.
Having your money in a high-yield savings account can help keep your money accessible while also earning you a higher interest rate than you’d get with a regular savings account. Find out where to put your money now by checking out our favorite high-yield online savings accounts.
At 4.25%, your $100,000 would earn $4,250 per year. At 4.50%, your $100,000 would earn $4,500 per year. At 4.75%, your $100,000 would earn $4,750 per year. At 5.00%, your $100,000 would earn $5,000 per year.
“With a nest egg of $100,000, that would only cover two years of expenses without considering any additional income sources like Social Security,” Ross explained. “So, while it's not impossible, it would likely require a very frugal lifestyle and additional income streams to be comfortable.”
The returns you would earn on a 1-year CD are as follows: At 4.0%: $4,000, for in a total balance of $104,000 at the end of the term. At 4.5%: $4,500, for in a total balance of $104,500 at the end of the term.
There are two approaches you could take. The first is increasing the amount you invest monthly. Bumping up your monthly contributions to $200 would put you over the $1 million mark. The other option would be to try to exceed a 7% annual return with your investments.
Add in another $22,000 or so from Social Security, and you could be in pretty decent shape. Coming into retirement with $100,000 in savings is far better than not having any savings at all. But the reality is that $100,000 just isn't a ton of money for what could easily be 20 years of retirement or more.
But you could also purchase a property, renovate and resell it. Or if you're looking to invest $100,000 for passive income, you might buy real estate and rent it out. While rental income is considered passive income, being a landlord often requires considerable work, which can make it feel like a more active endeavor.
Earning more than $100,000 per year would put you well ahead of the median American household, which brings in $74,784 as of 2021. Assuming you're an individual without dependents, that salary would qualify you as upper class, according to three different definitions (Brookings, Urban Institute and Pew Research).
The best widely available high-yield savings accounts currently earn an APY of around 4.85 percent. An amount of $100,000 in an account earning this rate will earn around $4,850 after a year, for a total of $104,850.
The average money market rate is less than 1 percent. But let's say you put $10,000 in an account that earns a full 1% APY. After a year, your balance would earn 100 bucks. Put that same amount in a money market account with a 4% APY, and it would gain just over $400.
There's no one-size-fits-all number in your bank or investment account that means you've achieved this stability, but $100,000 is a good amount to aim for. For most people, it's not anywhere near enough to retire on, but accumulating that much cash is usually a sign that something's going right with your finances.
High-interest savings accounts are another low-risk option, with interest rates averaging around 0.5%. A $1 million investment in a money market account could earn you $5,000 per year in interest income. Another great option you can explore is the Lyons Enhanced Yield Strategy.
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