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Good Personal Financial Management: The Real Benefits Of Saving

Updated on April 18, 2013

Why Having Savings Can Make A Big Difference

Having money put aside in case of emergencies can give an extraordinary sense of wellbeing created from having peace of mind. Not having to worry where the money would come from in the event of a crisis can make the difference between staying awake at night worrying or sleeping like a baby. This is why it is so important to save a decent lump sum of money and have it to hand when needed. Initially, saving can feel like an uphill struggle but once you start seeing your savings growing, it can get addictive. The incentive to increase your savings can start to out weigh the temptations of spending.

Saving is not investing.

Don't make the mistake of mixing savings and investments up as the same thing. Saving is a way of creating stability in your daily life by having financial security from money put aside to deal with life's events or emergencies. Investing is about putting money into a financial vehicle that will create money for a future event. With investing there is usually a risk involved, with saving, your money should be secure and you should get at least what you have put in, and hopefully with a decent sized amount of interest. The risks involved with investing can be rewarded with higher returns but there is no guarantee. Saying that, if you save wisely, choosing to keep your money in an account with a good rate of interest, you can still make a decent return in the long term.

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Your money working for you.

So not only is your savings giving you financial security and peace of mind it can also be working for you by creating more money through the interest. In addition, your savings will benefit from what's known as compound interest. Albert Einstein regarded compound interest as the eight wonder of the world and said 'the most powerful force in the universe is compound interest'. He may have been exaggerating a bit but it does have a remarkable effect on your savings. In essence, compounding the interest means that not only do you earn interest on the money you put into savings but also on top of interest already earned. The longer you save the greater the effect compounding has so it's never too early to start putting the money away.

Compound interest.

To work out approximately how much you can make by compounding, the rule of 72 can be used. (This works for rates of less than 20%). The rule of 72 shows you how long in years it would take to double your money as a result of compounding at a particular rate of interest by simply dividing the interest rate into 72.

Example: Double your money at 4% 72 divided by 4 = 18 years

Alternatively, the same rule can be applied to work out what interest rate you would require to double your savings in a particular amount of years.

Example: Double your money in 5 years 72 divided by 5 = 14.4%

The Real Benefits.

The real benefit of savings are having financial security and making your hard earned money work for you. Achieving this can be achieved through good personal financial management, making saving a priority over spending.

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