In India, a huge chunk of the population prefers charting out and following responsible savings plans. For such purposes where their principal corpus is not compromised, setting up a savings account is one of the best ways to go about it. Not only are there many kinds of savings accounts but also several banks with a variety of interest rates to offer on them. Based on the highest interest rate savings account, you can comfortably earn returns to ensure that your investment does not lose its time value. So, how can you go about calculating the interest earned through such an account? Well, this article will simplify all of it for you. Let’s dive right into the workings of savings account interest and its value over the months and years.
In India, most banks calculate interest on savings accounts on the daily closing balance method. This means that the bank calculates the interest earned on your savings account balance at the end of each day and adds it to your account. The interest rate offered by the bank is applied to the daily closing balance to calculate the interest earned.
For example, if you have a savings account with a balance of Rs. 10,000 and the bank offers an interest rate of 4% per annum, the daily interest earned would be Rs. 10,000 x 4% / 365 = Rs. 1.10 (rounded off to the nearest paisa). If your balance remains unchanged for 30 days, the total interest earned during that period would be Rs. 33 (Rs. 1.10 x 30).
It is vital to note that the interest rate offered by banks on savings accounts may vary from time to time and can also differ between banks. Therefore, it is advisable to regularly check the interest rate being offered by your bank and compare it with other banks to ensure that you are getting the best possible rate.
Now that you understand the daily closing balance calculations based on a static figure, let’s take this a step further. Instead of having a constant balance of Rs. 10,000 at each day-end of the entire month, let’s say that your closing balance fluctuates subject to deposits and withdrawals. Based on such figures, the interest calculated each day is automated and summed up. At the end of three to six months, each account holder is credited their interest directly to the savings account. Another element in play while such interest calculations is to consider the time value of money. Let’s look at the next section to get a better grasp.
The time value of money is a financial concept that refers to the idea that a certain amount of money today is worth more than the same amount of money in the future. This is because money has the potential to grow over time, due to the earning of interest. The concept is based on the idea that money can earn interest, and therefore, a sum of money today will be worth more in the future.
In the context of savings accounts, the time value of money plays a crucial role in determining the interest earned over time. When you deposit money in a savings account, the bank pays you interest on that money, which is calculated based on the daily closing balance. This means the longer you keep the money in the account, the more interest it will earn over time. In other words, the time value of money allows your savings to grow over time.
For instance, let’s say you deposit INR 10,000 in a savings account with an annual interest rate of 4%. The bank pays interest on the daily closing balance, which means the interest earned will depend on how long the money is in the account. Assuming you don’t make any additional deposits or withdrawals, after one year, the balance in the account will be:
INR 10,000 + (INR 10,000 x 0.04) = INR 10,400
However, if you keep the money in the account for two years, the balance will be:
INR 10,000 x (1 + 0.04)^2 = INR 10,816
As you can see, the interest earned in the second year is higher than the interest earned in the first year, due to the compounding effect of the interest. This demonstrates the time value of money concept, as the longer the money is kept in the account, the greater the interest earned, and the higher the balance will be in the future.
Tips for Selecting a High-Yield Savings Account: Typically, high-yield savings accounts offer better interest rates than traditional savings accounts. When selecting a savings account, it is essential to compare interest rates offered by different banks to identify the best one. Some other factors to consider when selecting a high-yield savings account include the fees, minimum balance requirements, and account features. Some banks may charge fees for account maintenance, ATM withdrawals, or transactions that exceed a certain limit. Additionally, some high-yield savings accounts may require a minimum balance to earn interest or avoid fees. It is also essential to evaluate the account features, such as mobile banking, bill pay, and customer service quality.
Strategies for Increasing Account Balance and Length of Time Invested: The higher the account balance and the longer the time invested, the more interest earned. One strategy to increase your account balance is to set up automatic transfers from your checking account to your savings account. By automating your savings, you can ensure that a portion of your income is regularly deposited into your savings account. Another strategy is to avoid unnecessary expenses and save more money. To increase the length of time invested, you can choose a savings account with a longer term. Some banks offer certificates of deposit (CDs) with fixed terms ranging from six months to five years. CDs typically offer higher interest rates than savings accounts but require a minimum deposit and a fixed term. It is essential to evaluate your financial goals and liquidity needs before investing in a CD.
Regularly Reviewing and Adjusting Your Savings Plan: As your financial situation changes, you may need to adjust your savings goals, increase your account balance, or invest in other financial instruments. Regularly reviewing your savings plan can also help you identify any unnecessary expenses and adjust your budget accordingly. Additionally, it can help you identify any changes in interest rates offered by your bank or other banks, which may affect your savings account’s interest earned over time.
Now that you know all about the time value of your savings account interest income, we hope you can make better financial decisions and choose a bank that gives you better benefits. For more information, stay tuned to our future editorials or browse through our article section on savings accounts!