Compound interest on savings account:
One of the best part of a opening an savings account is to park your idle money safely and watch its grow.
How it grows? The bank provides compound interest on savings account , so your money grows. Thanks to its Interest.
Interest earned on a savings account can help you build wealth and generate passive income over time.
By understanding the process of compound interest, you can maximize the growth potential of your savings and learn how to optimize returns.
What is compound Interest?
Compound interest is the process of earning interest not only on your initial funds, but also on the total sum of earned interest as well.
For example, if you deposit $1,000 into a savings account with an annual percentage yield (APY) rate of 5%, then you’ll earn $50 after one year.
The following year, you’ll start out not with $1,000 but with the new higher amount – in this case $1,050 – so your cumulative interest will be $52.5. The total amount on your savings account on year 2 would be $1102.50.
If you park the money for 10 years, you would have earned $628.89 as in interest and the cumulative amount would be $1628.89
Difference between compound interest and simple interest?
Simple interest earns interest on the principal amount alone. Wherein compound interest , Interest is earned on the principal and the subsequent interest accumulated over the period.
The principal amount on simple interest would remain same, But in compound interest, the principal amount changes as the interest accumulated over time.
As time increases, the amount earned through compound interest would be higher. But in simple interest, increases in time does not have effect. Since its interest earned is fixed.
E.g.: In compound interest, $1000 deposited in an savings account for 10 years would have grown to $1648.32.
In simple interest, a $1000 deposited in a savings account for 10 years would have grown to $1500.
Investor, looking for wealth creation should prefer compound interest over the simple interest.
Prospective loan applicants, should prefer loans with simple interest. As a borrower, you would be paying less interest charges in simple interest loan.
How often do savings accounts compound?
Depending on your bank and the account, Interest can compound annually, quarterly, monthly, even daily.
The more often interest compounds, the faster is the growth rate of your money.
The amount of interest you earn each year is based on the total amount of interest earned and how often it is compounded is expressed in terms as APY or annual percentage yield.
The more frequent your interest is compounded , the higher your APY ,hence your interest earnings will be.
Banks who provide great interest
IDFC First bank provides 3% to 6% interest on your savings account. The Interest is credited in your account on monthly basis.
Ujjivan small finance bank offers up to 7.5% interest on savings account.
DCB Bank offers up to 7% interest on savings account
Jana small Finance bank offers up to 7% interest on savings account.
Equitas small Finance bank offers up to 7% interest on savings account.
AU Small finance bank offers up to 7% interest on savings account.
Fincare small Finance bank offers up to 7% interest on savings account.
Utkarsh small Finance bank offers up to 7% interest on savings account.
Shivalik small Finance bank offers up to 7% interest on savings account.
Unity small Finance bank offers up to 7% interest on savings account.
Apart from savings account, you can also look CD’s and money market instruments if you are looking to compound your bank in a safe manner.
Also please note , as per the RBI guidelines the interest rate for above bank may vary slightly.
If you are looking to compound your money at higher rate, than compound interest on savings account. Then please click the below link: Index fund
Thank You for reading!