Understanding interest
Interest helps to make your savings grow. The higher the interest rate that your savings attract, the faster those savings will grow. Look for accounts offering an interest rate that's higher than the rate of inflation (the rate at which the prices of goods and services increase), where available. Otherwise, the real value of your savings may decrease. And remember that you may have to pay tax on the interest you earn.
Choosing the right savings option often requires a balancing act between the interest rate offered, and the terms and features it comes with.
For example, savings accounts offering higher interest rates may require you to:
-
Keep your savings in place for a defined period
-
Give notice to access your savings
-
Invest a minimum (or maximum) sum each year or specified period
By contrast, an account that offers instant access is likely to offer a lower interest rate.
Where you choose to deposit your savings will depend on what you're saving for. If you're building an emergency savings fund, for example, you'll probably want to be able to use that money at any time, so an account offering instant access would be important. However, if you're saving towards a deposit for a house, an account offering higher interest, but which requires giving notice to access your savings, may be a better option.
Compound interest
Compound interest is interest earned on previously earned interest. The longer you save, the more the interest you earn compounds. Compound interest quickly mounts up, and can significantly increase your savings over time.
Here's an example:
Let's say you make a regular deposit of INR50 each month (that's INR600 over a year) into a savings account, earning 3% interest annually. After one year, you'll earn INR9.71 interest. By the end of the third year, however, you have INR84.55 in interest, because you earn interest on the total balance (that already includes interest earned in the first two years).
| Monthly investment | 5 yrs |
10 yrs |
15 yrs |
20 yrs |
25 yrs |
|---|---|---|---|---|---|
| ₹2,000 | ₹160,000 | ₹410,000 | ₹840,000 | ₹1,530,000 | ₹2,680,000 |
| ₹5,000 | ₹390,000 | ₹1,030,000 | ₹2,090,000 | ₹3,830,000 | ₹6,690,000 |
| ₹10,000 | ₹780,000 | ₹2,070,000 | ₹4,180,000 | ₹7,660,000 | ₹13,000,000 |
| ₹20,000 | ₹1,560,000 | ₹4,130,000 | ₹8,360,000 | ₹15,000,000 | ₹27,000,000 |
| ₹50,000 | ₹3,900,000 | ₹10,000,000 | ₹21,000,000 | ₹38,000,000 | ₹67,000,000 |
| Monthly investment | ₹2,000 | ₹2,000 |
|---|---|---|
| 5 yrs |
₹160,000 | ₹160,000 |
| 10 yrs |
₹410,000 | ₹410,000 |
| 15 yrs |
₹840,000 | ₹840,000 |
| 20 yrs |
₹1,530,000 | ₹1,530,000 |
| 25 yrs |
₹2,680,000 | ₹2,680,000 |
| Monthly investment | ₹5,000 | ₹5,000 |
| 5 yrs |
₹390,000 | ₹390,000 |
| 10 yrs |
₹1,030,000 | ₹1,030,000 |
| 15 yrs |
₹2,090,000 | ₹2,090,000 |
| 20 yrs |
₹3,830,000 | ₹3,830,000 |
| 25 yrs |
₹6,690,000 | ₹6,690,000 |
| Monthly investment | ₹10,000 | ₹10,000 |
| 5 yrs |
₹780,000 | ₹780,000 |
| 10 yrs |
₹2,070,000 | ₹2,070,000 |
| 15 yrs |
₹4,180,000 | ₹4,180,000 |
| 20 yrs |
₹7,660,000 | ₹7,660,000 |
| 25 yrs |
₹13,000,000 | ₹13,000,000 |
| Monthly investment | ₹20,000 | ₹20,000 |
| 5 yrs |
₹1,560,000 | ₹1,560,000 |
| 10 yrs |
₹4,130,000 | ₹4,130,000 |
| 15 yrs |
₹8,360,000 | ₹8,360,000 |
| 20 yrs |
₹15,000,000 | ₹15,000,000 |
| 25 yrs |
₹27,000,000 | ₹27,000,000 |
| Monthly investment | ₹50,000 | ₹50,000 |
| 5 yrs |
₹3,900,000 | ₹3,900,000 |
| 10 yrs |
₹10,000,000 | ₹10,000,000 |
| 15 yrs |
₹21,000,000 | ₹21,000,000 |
| 20 yrs |
₹38,000,000 | ₹38,000,000 |
| 25 yrs |
₹67,000,000 | ₹67,000,000 |
*The rate of returns mentioned in the table is just for illustration purpose and no assurance of future returns.The above figures are without considering the annual inflation.
The earlier you start saving, the more time you have to earn compound interest. It's a good idea to make regular deposits, if you can, to keep your money growing. It's also best to avoid taking money out of your savings account as that reduces the amount of interest you're earning.
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