Savings bank accounts have been a highly preferred option since time immemorial. Such financial options offer a secure and safe place to park your funds. Additionally, they offer high liquidity, accessibility, and an opportunity to earn satisfactory returns on your savings. Explained here are how bank savings account interest rate works. Also highlighted are the benefits of using this option to attain your distinct short-term goals.
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How does interest on a savings account work?
The savings account interest rate is the percentage of interest earned on the balance deposited. The savings bank account interest rates are determined by the financial institution and are prone to change depending on regulatory guidelines and market conditions. Higher rates usually infer higher returns on savings.
Listed here are some key aspects of savings account interest rates –
Interest computation
Savings account interest is generally computed on a daily basis. Whether you have a regular or premium savings account, the interest computation formula is the same.
Daily interest = (daily balance X rate of interest)/365
Assume your savings account daily balance is Rs 1 lakh and the preferred bank offers a savings rate of 3.5 per cent for balances up to Rs 1 lakh. In this case, your daily interest constituent will be Rs 9.58.
However, note that your daily interest constituent on savings account vary depending on your daily balance. Although the savings account interest rate is computed daily, banks tend to credit the interest constituent half-yearly or quarterly.
Compound interest
Institutions offer compound interest feature on a savings bank account. Compound interest permits you to earn interest not only on the principal constituent but even on the interest generated over time. This considerably enhances your savings over the long term.
Life goals attainable through a bank account
Using savings bank accounts can assist you attain your distinct short-term life goals. Discussed here are some common goals that you can accomplish on parking your surplus once you open an account with the preferred institution.
Contingency fund
Maintaining a contingency fund is necessary for unanticipated expenditures. Savings bank accounts provide a secure and simply accessible place for storing your surplus funds while earning a satisfactory interest constituent to protect your stored fund against inflation.
Short-term financial goals
Parking funds for short-term life goals like buying a 4-wheeler, renovating your home, or planning a trip abroad can be done using a savings bank account. The interest generated contributes towards achieving your target goal quickly.
Down payment for a loan
In case you are planning to avail a loan in upcoming times, then you may consider accumulating a down payment through a savings bank account. Constantly depositing funds in your account will permit your savings to enhance, allowing you to meet the down payment needs and potentially secure a better loan rate.
Wealth accumulation
A savings account can come across as an initial measure for accumulating massive wealth. While bank savings account interest rates may not be as high as other financial options, they offer a steady and safe base for building satisfactory savings, particularly if you are a risk-averse individual.
Conclusion
Savings bank accounts for long have been a preferred option owing to their offered features such as liquidity, convenience, and the opportunity to earn satisfactory returns on parked amounts. Understanding the manner in which the savings account rates work is important for enhancing the potential returns on savings. By leveraging such accounts, you can attain your distinct short-term goals spanning up to three years, which include forming a contingency fund, accumulating the required down payment for a loan and saving for a vacation trip abroad. Also, it is crucial to remain updated about the changing saving rates to make an informed decision about savings.
