Compound Interest

May 9, 2007

Compound interest definitely should excite the finance neophyte (good word, huh?). I would highly recommend checking out the Lazy Man and Money blog as he’s an excellent teacher. Right now he’s in the middle of his Compound Interest Week, so each day he’ll post a new section on a different aspect of compound interest.

Today he posted on online high-yield savings accounts. As he notes today, when considering the decaying affect of inflation, these accounts don’t do much to grow your wealth (the ING orange savings account only grows your deposits approximately 1.4% per year in purchasing power). But, I would say it’s almost essential to put your short-term savings in one of these accounts, because they are secure, return a guaranteed percentage back to you, and are liquid enough to pull for emergencies.

So, keep about $1000 in your checking for dire emergencies, but after that keep all other short-term savings in a high-yield savings account to preserve that wealth whether it be your three-month emergency savings, savings for upcoming holiday gifts, or savings for slightly bigger ticket items such as TVs (even bigger ticket items would probably fall into long-term savings and should be put into mutual funds or similar types of investments).

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