Options for saving

Saving money can be tough, but it's essential if you want to reach your goals. Even if you're only able to set aside a small amount of money each month, savings can play a key part in establishing your financial security.

Why save?

If you're not sure why you would use a bank savings account, the answer is, in a word, interest. That's the money that your money earns for you. Viewed differently, it's the amount of money a bank pays you for keeping your money on deposit with them. Interest is a percentage of your account balance that the bank pays you at a specific rate on a regular schedule.

You'll find that different types of savings accounts offer different interest rates. In addition, each account has different rules, such as minimum balance requirements, limits on the number of monthly withdrawals, etc. Be sure to choose the one that suits you best — or select a combination to help you meet different needs.

Different ways to save

• Allow you to withdraw your money whenever you want

• Pay a steady — though often small — interest rate, though you may have to maintain a minimum balance to qualify

• Generally pay a higher interest rate than regular savings accounts

• If you withdraw your money before the end of the CD's term, you forfeit some or all of the interest

Money market accounts (MMAs)

• Usually pay a higher interest rate than regular savings accounts

• Allow you to write a limited number of checks or make a limited number of transfers each month

• May not pay interest, or imposes fees, or both, if account balance drops below required minimum

Compounding

There are two ways interest can be added to your account: simple interest and compound interest. Simple interest is just that, it's added once a year to your balance. If you earn 2.5% interest and you have $10,000 in the account, you'll earn $250 the first year, bringing your total to $10,250 and another $250 in the second year, bringing your total to $10,500.

Compound interest, on the other hand, means that your interest rate is calculated on your total balance, including any interest you've earned in the past. So, in the first year you'd earn $250, bringing your balance to $10,250. In the second year, though, the 2.5% interest would be calculated on your $10,250, meaning you'd earn $256.25, bringing your total to $10,506.25. That might not seem like much money, but the difference increases dramatically over time.

How often interest is compounded can vary from bank to bank. Some offer daily compounding while others offer monthly, semi-annual or annual compounding. The more frequently your interest is compounded, the more quickly your earnings will build.

Click here to learn more about calculating compound interest.