Understanding interest rates and being realistic about how it is paid is one of the fundamentals of having a savings account. Also, one of the basics to work out your interest plans is to have a fair understanding of how compound interest works for borrowing and saving. It is of utmost important for you to understand that you can always avail high interests on your savings account, by investing for long term and then by reinvesting the interest and the principal amount again for high interest rates.
Calculating interests for your savings account
If you are not familiar with the methods as to how calculations relating to savings accounts are made; here is a sneak preview of the same.
Amount in your Savings account: $100
Annual Interest: 10%
Amount with interest after 1 year: $100+$10 + $1= $111
Amount with interest after 2 year: $111+$10 = $121
Therefore, you can see that you are not only earning money from your principal amount, but even generating money from the interests year after year. This is crucial as it leads to the fact that the longer you save, the more you earn.
Know the effect of annual or monthly interest
At the same time, it is also important to know the effect of the annual or monthly interest incurred for your savings accounts. On interests that are paid annually, the annual gross rate and the Annual Equivalent rate (AER) should be the same. However, for interests that are paid monthly, the quoted AER will be slightly higher than the gross rate, apart from the fact that there is an additional compounding effect. On the contrary, you can also take into account the monthly interest, as this also is left in the account, this also adds to the interest amount.
Managing Savings accounts interests
· Make it a point to make regular deposits in your savings account at the beginning of each month.
· Ensure that withdrawal of any funds takes place only after the last day of every month.
· Ensure that interest payments are appropriately credited into your account by a regular and careful checking of your bank statements.
Manage funds generated from interest in your savings account to move to short term fixed deposits, leaving just the minimum for regular expense in the savings account. This will help fetch you a higher interest rate on the fixed term deposits.