Leveraging your pennies

Remember that old saying, "A Penny Saved is a Penny Earned?" You probably have heard the phrase and thought it is was something that no longer is relevant to us. And that may be true, as today it costs more than a penny just to make a penny. Despite this bad economics, you can really supplement your savings account by saving just a few extra pennies. Any way to make our savings account is a very good thing, especially for those us with very little income. Just a word of warning however, you won't become a millionaire just saving pennies, but it is a good place to start. Lets take a look at a few scenarios.

Let us assume that you are 20 years old, and will retire at age 60. You don't have much money so you start with one penny and will add another penny every month for the next 40 years. You will save these pennies in a high yield savings account that gives you a 4.5% annual interest rate compounded monthly. So let us take a look at the outcome...

After 40 years, you will have saved $13.47. Granted that you only contributed only $4.80 into the account, I'd say that is a pretty good deal.

Let's translate this to if you decided to save $5 monthly for the next 40 years with the same parameters above, you would end up with $6,705.75. A nice chunk of change and a nice outcome for only contributing $2,400.

If you just saved $100 today, and didn't add anything more to it, you would have $602.93 when you retire.

Again, you by no means will you become a millionaire by saving pennies or just a few dollars, however this just shows how saving a few pennies or dollars each month or starting a savings account now can truly add up.

The key here is having compounding interest work for you, which means interest is paid to you every so often. Then, for the following periods you can earn interest on both the interest that you earned and the initial amount that you put in, then the process continues. Remember, the more frequent an account pays you the better, as the effect of compounding increases. Usually, on solid savings account, interest will accrue daily, and paid out monthly.

Why such an urgency to save? Well, aside from having your money work for you, you must remember that your money today will be worth less than the same amount in the future. This is because when you take into account inflation, something that you can buy for a $1 today, you won't be able to buy for $1 in 40 years.

Thus, that is why it is so important to have your savings continually grow at a steady interest rate so your money will keep its value. Knowing this, it is never a good idea to just let your cash lay around, or even have your cash lie in accounts that bear little or no interest, as its value will quickly diminish.

Remember, you must have your money work for you, and you not working for your money.

A penny saved is truly a penny earned. Simply leverage your pennies and it will go a very long way to shaping your financial success.