So, you’ve started at a sweet job and are pleasantly surprised to find that you’ve got $100 left at the end of the month after bills and investing toward retirement.
You decide on starting a cash savings account with a long-term goal of building it up to $10,000.
Because you’ve read up on compound interest, you want the best interest rate possible! The bank you have your paycheck direct-deposited into offers 0.3% on savings, but after talking to friends and making several phone calls, you decide to go after the 0.5% at a local credit union.
But just as you’re about to start the online application, a pop-up ad for an internet only bank yells at you, mockingly, touting a 0.6% interest rate.
You head to Google just in case there’s a 0.7% — or something even better?! — hidden somewhere among the vast expanses of the internet and 14 hours later, give up; saving is stupid, you decide.
It doesn’t have to end this way!
Saving is not stupid, but you’re worrying about the wrong part of it.
There are very few times when I think that interest don’t matter.
But I think that this is one of them: When you’re just starting out, the interest rate on your savings doesn’t matter nearly as much as the contributions you make to savings.
An example with real numbers
Don’t believe me? Let’s look at some numbers:
This chart assumes a monthly contribution of $100 on the first of the month. Here’s what the columns mean:
- APY: The Annual Percentage Yield — the effective annual interest rate
- Total interest, 5yr: The sum of the interest you’ll earn at the given APY
- Avg. monthly diff.: Take the total interest you’d get at the given APY, subtract the total interest you’d get with an APY of 0.5%, and divide by the 60 months in five years
As you can see, all that consternation you’d go through to get a savings account with a 0.7% rate rather than 0.5% will reward you with an average of 52 cents a month over the first five years.
But what if you managed to find some place that would pay you a full percentage point more? That has to matter, right?
As you can see in the final row, the total difference over the course of five years creeps into the hundreds of dollars, but the average monthly difference is just $2.60.
You can add an extra $2.60 to your savings every month by drinking one less fancy coffee!
If you’re a recent grad, find a bank that treats you nice and gives you a decent interest rate, but focus your energy on spending less money or making more so that you have more to save.
Or focus your energy on making the world a better place, if that’s your thing.
Just don’t waste time trying to get an extra 0.1% because that’s ridiculous and there will be plenty of time to worry about interest rates later on when you’ve got tens of thousands in cash in a savings account. Or if you truly feel the need to worry right this second, then worry about the returns you’re getting on your retirement investments.