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Dear Money101:

I am currently making $22,000 a year and am a little strapped for savings. Should I wait to save money later on when I will (hopefully) make more money? -Sam   

It takes a lot of discipline to put a portion of your paycheck into savings—especially when money is tight, but even socking away just a small amount from an early age can really add up in the future.

“Paying yourself first by saving a portion of your income before it gets put into your spending account is a wise way to save money,” says Erin Constantine, a spokesperson for Wells Fargo Consumer and Small Business Deposits. “Even if current interest rates on savings accounts are low by historical standards right now, young people can still build up a balance by making regular deposits.”

Life is full uncertainties, and having money set aside to act as cushion to help pay for them will keep you out of debt.  “If you start saving early with smaller amounts of money, you are guaranteeing yourself some savings later in life. Plus, you get the bonus of compounding interest,” says Reyna Gobel, author of Graduation Debt: How to Manage Student Loans and Live Your Life.

Compound interest is a savers best friend--by earning interest on your interest. Compound interest is a fixed rate of "rent" on the amount of money you place in an account that pays a guaranteed interest rate. The annual percentage yield [APY], which takes into account the effect of compounding, is what you will actually receive in a year. Knowing the APY allows you to compare different bank’s rates.

“When you earn simple interest, you only earn interest on the amount you save or invest, no matter how long your money sits there,” explains Gobel. “With compounding interest your interest also earns interest. So let’s say you save $100 per month for 20 years with a 3% interest rate.

Your total investment is $24,000. You earn an extra $7000 in 20 years of simple interest. 

However, if your interest compounded monthly, you would earn about $9,000 in interest with the same monthly deposit.”

If you can secure an interest rate that compounds more frequently, such as quarterly or monthly, the more interest you’re going to accrue.

However, with banks taking a hit in the last two years, many of them have slashed their interest rates. But it’s good to get into a savings routine now and get accustomed to saving and build up a  stash that can really blossom when rates start to climb again.

 “There are a variety of ways to create a savings habit – you can make it automatic…or make it a point to save a set percentage of income, which could be allowance, birthday money, or from a part-time job,” says Constantine.

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