The interest rate for savings accounts is relatively low. You’ll see two figures in bank advertisements:

• The annual percentage rate (APR) is the interest you earn in one year.
• The annual percentage yield (APY) is a higher figure that includes compound interest.

The APY presumes that you do not withdraw the interest you have already earned during the year. You earn interest on your original savings and the interest on the earnings in your account.

Restrictions on Accessing Your Money

Although savings accounts have few if any restrictions on accessing your money, you should refrain from making withdrawals if:

• You’ll receive a lower rate of interest on smaller balances.
• Interest isn’t credited until the end of the quarter or month.
• You’ll fall below the minimum balance

Most savings accounts impose minimum balance requirements. Accounts that fall below the threshold are subject to termination or maintenance fees; they may also not earn interest. A maintenance fee might be higher than the interest rate you’re receiving, which means you’re losing money in your savings account.

Rule of 72

Even if you’re not a math major, you can easily calculate how long it will take for your money to double at a particular interest rate. You can perform that calculation with the Rule of 72. The Rule of 72 illustrates why it is so important to get a higher return on your investment. Here’s how the rule works:

• Suppose your money is in a savings account that pays 2 percent interest. It will take 36 years for your money to double, because the number 72 divided by 2 equals 36.

• Even if you find a savings account that pays 4 percent, it will take 18 years for your money to double. This time you take the number 72 and divide it by 4 which equals 18.

• If you opt for a more aggressive investment like a mutual fund, you might achieve a 9 percent rate of return. In that case, your money will double in 8 years, since 72 divided by 9 equals 8.

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