How Much Will Your Savings Really Be Worth?

People often invest in savings funds in order to help finance their retirement. Many individuals feel safer in conservative funds such as money market accounts, known in the United Kingdom as an ISA. Having a savings account is certainly a good idea but many people fail to take into account that the interest rate of their savings fund or ISA will not keep up with inflation unless regular large deposits are made. This is why it is important to check out online calculators that allow you to calculate what your savings fund or ISA will actually be worth when you retire or withdraw your savings, compared to the rate of future inflation.

What Can Your Savings Earn?

Any savings fund or ISA should offer a decent rate of interest. Anything below 3% is not going to go very far even if there is a regular infusion of cash into the account. People are often drawn to these low interest accounts because they are so safe and generally avoid the market fluctuations that can otherwise show up in an investment portfolio. As a general rule, those who are willing to risk certain market fluctuations end up with more money in their savings fund when they retire. This is because most funds that depend on the market also earn much higher interest rates when the market is doing well. So instead of earning 3%, these funds can earn 10% or over in some cases. This makes a big difference when it comes to compounding the money already in the savings account.

The magic of a savings account or an ISA is the compounding effect on the money in the fund. If you start out with $10,000 the first year and earn 10% interest, you now have $11,000 in the account the next year. The interest is now compounded from this amount, plus any money that is paid into the fund on an annual basis. This can really add up after a few years and will continue to grow steadily as long as the interest rates are good and regular financial contributions are made. This is one way to keep ahead of inflation. Checking an online inflation calculator can help you figure out how much money you need to contribute every year and how high the interest rate must be to keep up with or ahead of inflation.

Start Saving Early

This is why it is such a good idea to start a savings account or ISA as early as possible to have the longest amount of time to compound interest and make regular contributions. Many parents start a fund for their children to help set them up for a prosperous adulthood. It is important to be aware of the interest rate and monthly or yearly contributions that are required to make sure the fund is adequate for a comfortable retirement. This can be done with prudent planning and keeping an eye on what the fund is doing. It is always possible to switch to a higher interest rate fund if it is necessary should the fund not grow as fast as it should to keep up with inflation.

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