In this information technology world we are increasingly used to seeing immediate results to actions we undertake. The secret to long term savings is not to expect this. Three golden rules: start putting away a small amount, plan to put away this amount for the foreseeable future and once it’s put away, forget about it.
Most people are already intimately involved in compound interest even if they don’t realize it or don’t understand what it is. It is applied monthly to their credit card bills, their loan repayments, their mortgages. Given that, why not have an account where it is also applied – but positively, not negatively – to savings?
The most effective savers don’t save much a month, but they save that small amount consistently, month after month, year after year, decade after decade and that money continually gets interest added to it, and grows sometimes to huge amounts. $100 initial investment, followed by a dollar a day over 25 years at 1.2% yields nearly $11,000. At 2%, as a tax free sum, this becomes over $12,000.
Some people even involve themselves in “stoozing” – a practice whereby a person gets a 0% loan, sometimes from a credit card company that is offering 0% as an incentive to switch providers. They withdraw the maximum allowed, immediately placing this into a high interest account, then withdraw the capital and the interest just before the 0% term expires. They then repay the capital, cancel the card (thereby owing nothing to the credit card company, since there was no interest on the capital which has now been repaid in full) or balance transfer to another provider who is offering a 0% incentive, and keep the money gained from the interest. A few even then place this interest away in a savings account before starting the cycle again, leaving each cycles gained interest to then accrue interest of its own. In this way they have legally used the banks and credit card companies in exactly the same way as banks, credit card companies and investment groups use one another – to accumulate money from each others capital.
Savings are one aspect looked at by lenders in the event that a person needs a mortgage or a credit card. Banks are much more eager to lend to those who don’t rely heavily on the loans, since these loans are much larger to be paid off. Credit cards are much more eager to offer better deals (lower interest rates or incentive plans) to solvent borrowers, since these are the ideal borrowers; they can afford to repay their debts, and a sudden emergency or financial crisis is much less likely to impact their ability to continue to settle credit card payments on an ongoing basis.
There is also a much stronger incentive for banks and credit card companies to be open to negotiation by people who have the savings to back up a threat to switch bank or card provider. Those with savings often find their banks and credit card companies much more willing to listen when their customers want something; there is no better bargaining tool than to be able to afford to take ones business elsewhere in the event that one fails to get satisfaction.
Finally, savings don’t vanish with the death of an individual, whereas debt is subject to write-off because it belongs to the deceased and was their responsibility. Savings pass to the next of kin, meaning that ultimately there is a point to any savings, since they live on even after an individuals death. This may seem morbid to consider, but equally it is a comfort to those who are terminally ill or have lived a productive life to know that even if they can nowadays do very little, savings are among the things still left to them that will benefit those they hold near and dear when they themselves are no longer around.
You never know when one of the proverbially rainy days is going to come along. It is an uncertain world in which we live; anything that grants us stability even if prosperity takes a long time is something that we should all be considering. There are enough uncertainties already without us allowing savings and future financial security to be among those that we lose sleep over. A savings account with as high a rate of interest as possible is the most risk-free and sensible way of building a contingency plan against the worst fiscal nightmares the world can throw at us.