Hi! Thank you for writing! Basically, a savings account is an account at a bank or credit union where you keep your money. You set up an account then you keep your money there. It's much safer than keeping cash around the house where it could be stolen, lost or just frittered away in spending.
Banks and credit unions are almost free or very reasonable in fees, but they are not without costs, especially when you break their rules. You can get hit with fees like these: monthly service fee, minimum balance fee, Automated Teller Machine (ATM) user fee, or overdraft fee.
However, you also may be able to earn a small amount of interest on your money while you keep in in the bank. Interest rates are very low right now, so you aren't earning much in a savings account, but you can earn a little. Interest is the amount of money banks pay you for keeping money on deposit with them. It’s expressed as a percentage and can be compounded daily, monthly, or annually. It’s a way that your money works for you when it’s just sitting there. For example, if you save $1 a day for 30 years, at the end you’d have $10,800 if you stuck it under the mattress and earned no interest. If you were able to earn 5% interest compounded daily, you’d end up with $25,069. The difference if you were to save $5 a day is $54,000 with earning interest versus earning 5% compounded daily is $125,328.71. That’s a big difference in results. Finding a place that would actually pay you 5% in interest in 2016 without the risk of losing your principal is unlikely. It would be hard – or impossible in 2016 – to find 30 years of risk-free guaranteed 5% interest a day, but you get the picture of how compound interest helps you when you put your money in the bank.
Saving and investing are not interchangeable terms. When you save money, you know how much you will get when you take the money out. You don’t expect that money to work for you and grow as you do with an investment. You save the money in a jar, in a checking account that pays no interest, or in a bank that pays very minimal interest. When you need it to pay for something, it’s right there.
When you invest money, you put your money to work for you, hoping to get more money out in the future. You put your money in investment vehicles of varying levels of risk. You also commit to longer-term investments that have the potential to make money for you but may not be as “liquid” (or easy to quickly sell) as your savings. Even though you can turn your investments into savings later on (or vice versa), you invest with the direct purpose of increasing your money, so you are willing to let it be tied up for a period of time.
What are the best ways to save money? As discussed above, it’s safer to keep your money in a bank or credit union than stashed in your house. It also helps to have a checking account that you use for paying bills and one or more savings accounts where you save money for future purchases. Savings accounts earn a small amount of interest, which is better than no interest. If you use coupons and look for deals when you shop, even small amounts of money matter to you and are worth getting. A savings account keeps your money “liquid” or easy to get to when you need it. This liquidity is the main difference between your savings and your investments. When you invest in certificates of deposits, bonds, real estate, or stocks, you might not be able to sell those items at the moment you need the cash or if you do sell them you could lose money or have to pay penalties. Your savings are accessible any time to pay for the things you are saving for: a vacation, wedding, repair, or other expense.
I hope this helps! Best wishes to you!
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