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Study Americans who understand compounding boost savings

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WASHINGTON (10/18/07)--What gets Americans fired up about saving money? According to a survey released last week, it’s a simple message: Give examples of the miracle of compound interest (Consumer Federation of America Dec. 11). When told that saving $200 a month for 40 years at a 5% interest rate would grow to more than $300,000, four out of five survey respondents say this example of the miracle of compounding would help persuade them to save money. Compound interest is calculated not only on the initial principal, but also on the accumulated interest of previous periods, so you’re building savings at a much faster rate. The survey of more than 2,000 adult Americans, released by the Consumer Federation of America (CFA) and Wachovia, sought to understand why Americans do--or don’t--save money. Also at the top of Americans’ wish list is an attractive savings account. Respondents reported several factors that influence their savings: access to contributory retirement programs such as a 401(k) (75% important, 52% very important); easy access to savings accounts paying 5% (73% important, 39% very important); and automatic transfers from checking or payroll deposits to savings (65% important, 36% very important). Of the more than 1,300 savers in the study, nine out of 10 said that avoiding credit card debt was an important factor in saving money, and 82% said it was very important. Other factors cited as successful saving strategies:
* Planning and monitoring spending (93% important, 69% very important); * Making regular contributions to an employer’s retirement plan (80% important, 62% very important); * Transferring surplus balances to savings (78% important, 40% very important); * Saving a portion of financial windfalls (78% important, 45% very important); * Making mortgage payments to build home equity (76% important, 64% very important); * Automatic transfers from checking to savings or to other investments (75% important, 48% very important); and * Saving loose change (65% important, 31% very important)
One of the easiest ways to save for future goals is to take advantage of tax-deferred retirement plans. If your employer offers a 401(k) plan, contribute as much as you can; you’ll not only build savings faster with the employer match, you’ll also cut your tax bill. For those in the 25% federal tax bracket, every $1,000 socked into a 401(k) trims your taxes by $250 ( Feb. 27). The earlier you start, the more savings you’ll build with the miracle of compound interest. For more information, read “Flawed Assumptions Sap Retirement Savings,” in Plan It: Retire Ready Toolkit.