Meet Jasmine, she is 20 years old and her goal is to buy a home in the future. Jasmine is already saving for that future home purchase and recently learned how to save responsibly.

 

When she was younger, she had a piggy bank and often added money to it. The problem with a piggy bank was that her money just sat there. She got out the same amount she put in.

 

Instead of using a piggy bank, Jasmine found a way to help her money grow over time by saving it in a bank or a credit union, where she can easily get it back when she needs it.

 

While it's there, the bank uses her money to help other customers who need to borrow money. It's like Jasmine is loaning her money to the bank. Because she's helping the bank, they add a little extra money to her account automatically.

 

It's these payments from the bank that help her money grow over time. This extra money is called "interest", and it's paid to Jasmine over the course of a year. The amount of interest she earns is based on two things - The amount she has in the bank and the Annual Percentage Yield or APY which is a rate set by the bank.

 

Here's how they work together.

 

Let's say you deposit 100 dollars in a savings account with a 3% APY. That 100 dollars will earn 3 dollars in interest over the course of a year. Now, you could take that 3 dollars in interest and buy a latte. But you decide to leave it in the bank.

 

This way you have more money in the bank and earn interest on 103 dollars instead of 100 dollars. As long as you leave it alone, your money will grow even faster because the interest adds up year after year. It's called "compound interest" and this simple idea will help Jasmine buy a home.

 

Here's how.

 

In her piggy bank, Jasmine has saved 5,000 dollars. But for the home she wants, she knows she'll need more and realizes that smart saving is all about thinking long term. If she deposits this in a bank and earns 3% APY, that 5,000 dollars will become 9,000 dollars in 20 years. That's 4,000 dollars more thanks to compound interest. Nine thousand dollars is good, but it may not be enough.

 

To help her money grow even faster, Jasmine decides that she can add 100 dollars to her savings each month. That's 1,200 dollars a year - even more money to earn interest. This will be a huge help. Jasmine can see she's getting close. 

 

With the 5,000 dollars she has saved, plus the money she adds monthly, she can save 29,000 dollars over 20 years, if she saves it in a piggy bank. But with compound interest from her bank, that 29,000 dollars could become over 42,000 dollars in 20 years. A nice start on buying her dream home. All she had to do was add money to her savings regularly and watch it grow. Yay!

 

If you are ready to save responsibly, visit a bank or credit union and talk with a financial professional about APYs and savings. The keys to smart saving are to start today, add money regularly and watch how compound interest can help your money grow and grow.