8.33 is the magic number

8.33 is the magic number for savings. 8.33% represents the portion of your monthly income that you would have to save to have a month’s pay socked away at the end of a year. For example, if you take home $2000.00 a month, and save 8.33% of that ($166.60) each month, after 12 months you’d have $1999.20 saved up. That’s not bad, but it gets better.

Now let’s consider what happens if you make monthly deposits into a savings account that earns interest at a respectable 4.50% per year. After one year, starting from scratch and putting away $166.60 per month, you would have $2040.95 in that account. Ok, that $40.95 in interest isn’t going to make you rich, but you didn’t have all $2000 of principal working for you for the entire year. After the second year, during which time you have the $2040.95 working the whole time, plus the monthly deposits, the account will have $4175.67. This second year really starts to show you how the compounding interest grows your money. You’ve earned $177.27 in interest.

Skipping ahead to the end of the 10th year, the savings account will hold $25,189.60, and $5197.60 of that is interest. That’s a new car, or a 20% down payment on a $125000.00 loan.

Open a savings account and start putting away 8.33% of each paycheck. After a little while, you won’t even notice the difference, and you’ll be growing a nest egg for a down payment on a car or house.

Now let’s bump the interest rate up to 5.05%. Check the sidebar for some banks offering 5.05% or more. Making the same deposits as before, after ten years at 5.05% APY, your account will hold $25,939.35. That’s an increase of $749.75 over the lower 4.50% per year.

No matter how much you can afford to save, it’s smart to do so regularly. Shop around for the best interest rates and keep making periodic deposits. Use the calculators at bankrate.com to see how much you could save.