A Savings Account is one of the most common financial tools employed by people to save and grow their wealth. Although starting a Savings Account is straightforward, understanding Savings Account interest rates can be intimidating.
In this blog, we will try to provide you with a layman’s guide to understanding the workings of Savings Accounts interest rates.
What Are Savings Account Interest Rates?
Savings Account interest rates are a percentage of your account balance that your bank pays back to you in interest. The rate of interest varies from bank to bank, as do the country’s ongoing economic conditions.
For example, if your bank offers you a 5% annual interest rate, you will receive 5% of your total balance in your account in interest over a year.
How Is Interest on a Savings Account Calculated?
The Savings Account interest rate is mostly calculated daily, but based on your bank’s policies, the credit occurs either monthly or quarterly.
The formula for calculating Savings Account interest is:
| Savings Account Interest = Daily Balance × Number of Days X (Rate of Interest/Days in the year) |
For example, if you maintain ₹200,000 in your bank account at a 4% per annum interest rate, then your interest rate for the month would be
200000 ×30 × (4/100) / 365 =₹657.53.
Factors That Affect Savings Account Interest Rates
- Economic Conditions: The economic conditions of your country have a strong impact on the interest rate offered by the bank on your Savings Account.
- Bank Policies: Different bank accounts offer different rates of interest to customers. Some private and small finance banks offer high rates of interest to lure more people into opening Savings Accounts.
- RBI policies: Changes in the Reserve Bank of India’s monetary policies can affect the Savings Account interest rate. When the RBI issues high repo rates, banks tend to increase deposit rates, including Savings Account interest rates.
- Type of Savings Account: The nature of Savings Accounts also affects your interest rate. Whether you have a Savings Account, salary account or senior citizen’s account, your interest rate will differ.
- Competition among banks: Banks compete with each other to attract customers by offering competitive interest rates.
Simple vs. Compound Interest in Savings Accounts
Simple interest is calculated on the principal amount only, i.e., the original sum deposited in your account. The formula for calculating simple interest is:
| Simple Interest= Principal x Rate x Time |
Compound interest takes into account not just the Principal amount but also the interest that has been added to your account over time. Compound interest helps your money grow faster over time.
How to Maximize Your Savings Account Interest?
- Choose a high-interest savings bank account after careful consideration and comparing various other contending banks.
- Always try to maintain a high balance. Interest rates are calculated daily, so keeping more funds in your account will earn you more interest.
- Opt for an FD-linked Savings Account to enjoy dual benefits.
- Check your interest payouts frequently to find out if the interest is being paid monthly or quarterly.
Conclusion
Understanding Savings Account interest rates helps you make smarter financial decisions. While Savings Accounts carry lower interest rates compared to other investment instrument, as they are a secure and good place to start saving and managing your funds.