Have you ever wondered how much money in your savings account is earning just by staying in the bank? While stashing cash in the bank account is a financial move, understanding how your money grows is even smarter. Knowing how interest is calculated helps you to make informed decisions and maximise your returns.
This article breaks down the basics of interest rates on savings accounts by simple and compound interest and explains how to estimate your earnings.
The Basics of Savings Account Interest
Interest is the money a bank pays you for keeping your funds in their care. Essentially, a reward for lending money from you.
Key Interest Terms
- Interest Rate (APR): The Annual Percentage Rate (APR) is the yearly interest without compounding.
- Compounding: The process of earning interest on your principal amount or any earned interest is called compounding.
- Interest Period: The time interval at which the interest is calculated and added is called the interest period.
How Do Banks Determine Savings Account Interest Rates?
Banks calculate interest rates on savings accounts every day, depending on the closing balance available in the account.
However, some banks also offer your monthly interest payouts.
Savings Account Interest Calculation Formula
A savings account generates compound interest. The interest you earn from your savings account also earns interest if you maintain the same balance without withdrawing the interest income.
The formula for calculating interest rates on savings accounts is:
Factors Affecting Your Interest Earnings
Here are some factors that you should consider to earn higher returns on a savings bank account:
- Interest Rate: It is computed annually, and the bigger the figure, the more interest you receive.
- Taxes: Interest earned on savings is taxed if a certain cap is surpassed.
How to Find Your Savings Account Interest Information
This information can be available on:
Bank Statements: You can review your bank statements to know how much interest you have earned.
Online Banking Portals: Log in to check real-time and past interest earnings.
Bank Website or Customer Service: You can find current interest rates and how often interest is compounded. This will also show you how much interest you have earned to date.
Final Thoughts
It keeps you aware that knowledge is the power to manage your finances.
Ensure you review what’s happening with your bank account, pay attention to the interest rates, understand how your money is being compounded and track the growth you are seeing. In time, compounding interest will add a lot to your savings.
