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updated: 4/26/2011 10:09 AM

Babowice: A penny saved is a penny earned

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  • If you dropped some of your income in the piggy bank or set up a bank account instead of spending the money, then you'd have some money available to you at a later date.

      If you dropped some of your income in the piggy bank or set up a bank account instead of spending the money, then you'd have some money available to you at a later date.
    Daily Herald file photo

 

So you made a fast buck -- maybe grandma sent you money for making good grades, or you were as good as gold and rewarded with cash.

There are a few options on what you could do with it -- spend it, stash it in your piggy bank, or set up your own junior saver's account at a local bank.

Let's have a penny for your thoughts on these ideas about managing your assets.

Michael Miller, economics professor at DePaul University in Chicago, says you have to understand why it's important to save that hard-earned money and avoid the temptation to run off and buy a new video game.

"People earn money from either working or from investments, and they use the money they earn to meet their needs, such as food, housing and clothing," Miller said. "These same people often ask themselves an important question: How will I be able to buy food and housing sometime in the future if my income stops due to a lost job?"

That's where the piggy bank and the bank account come into play.

If you dropped some of your income in the piggy bank or set up a bank account instead of spending the money, then you'd have some money available to you at a later date. As the expression goes, you'd save for a rainy day.

The piggy bank has some downsides. It can't tell you how much money is in its belly, and it doesn't pay you to hold on to your cash.

"There are a few problems with this method of saving, especially if we are talking about saving hundreds or thousands of dollars rather than just two or three," Miller said.

"Someone could come into your room and take your piggy bank. When that happens, the money is gone and no one will be there to replace what you lost. "

The bank account will not only save you a pretty penny, but it can help you to grow your income.

"What if you could find someone who needs $2 a week for the next five weeks, and they would be willing to use your money and even pay you a little more in return for the privilege of using your money?" Miller asked.

"Then, after five weeks, if you'd put away $8 each week, you would have $40, plus the little extra that person paid you because they used your money. You could end up with more money than you started out with."

Miller said the money the bank pays you for saving in an account is called interest. While they hold on to your money, the bank mails or emails a monthly letter that itemizes the account balance -- the money you deposited, plus the interest they pay you. Once you begin to receive a regular pay check, you can have that money deposited directly into your savings account.

That'll save you some time, which some people say equals money.

You can't lose money that's been deposited in a bank account as long as you keep less than $250,000 in your account. Bank deposits are protected by the federal government.

"In the end, you will have more money than you started off with, unlike what happens when you put your savings in a cookie jar or piggy bank at home," Miller said.

Money doesn't grow on trees, but you can make your money grow by placing it in an interest-bearing account.

Paying interest for storing money or commodities in a bank is a custom that dates to before 1700 B.C. The Babylonians had laws governing banking, as did the Greeks and Romans. During the Renaissance, a few families became extremely wealthy and powerful when they became bankers in the Italian city states.

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