Last week, I spoke to a class of Accounting I students at a local high school, and an interesting topic came up when we were talking about saving for the future.  I asked if they knew what interest rate their bank account was paying.

There were a variety of answers, but one took me by surprise.  He said he kept his savings at home. How many of you do this?

For teens and adults, the benefits of saving in a bank account is twofold – both time and compound interest.  He was missing out on the second.  Yes, he has easy access to the money when he needs it (that may, or may not, be a good thing). But, he was missing out on interest payments.  Interest is what makes your money grow.

Compound interest is defined as “interest added to interest previously earned on a principal balance”, according to Barron’s Dictionary of Banking Terms.  So, if you were to save $10 a month for a year without interest you would have $120, but with an interest rate of 2% you would have $131.  Add the power of time and after five years it would be $600 versus $642 and finally after ten years $1,200 versus $1,341.

You should be saving as much as you can by using a bank account that pays you the highest interest rate without paying fees. You may have to shop around and look at many banks, credit unions, online banks etc. to find the account that is best for you.