A savings account is defined as an interest-bearing deposit account held at a bank or any one of such similar financial institutions. A savings account typically allows for a limited amount of withdrawals and sometimes deposits, usually within a month. Generally, they are ideal for building your emergency fund, meeting your short-term goals and stashing surplus cash that you do not have urgent plans for, so that it can earn interests for you within the duration.
Interest on the other hand, is the cost of using somebody else’s money, as explained by Justin Pritchard in The Balance. Money deposited in a bank is seen as money borrowed a bank by the depositor (the lender), and the bank pays interest to the depositor as compensation for the risk of lending their money.
How can one calculate interest rate on a savings account?
Interest is calculated as a percentage of a loan (or deposit) balance. The amount is usually quoted as an annual rate (i.e Pa – Per annum), but interest can be calculated for a period shorter or longer than one year. Money deposited into an interest-bearing Savings account or any other account that bears interest; Are used by banks to offer loans to other customers and make other investments, and they pass a portion of the profit to you as interest.
Example: You deposit N5,000 in a savings account that pays a 4% annual interest rate. With simple interest, you’d earn N200 over a one-year period. To calculate:
- Multiply N5,000 in savings by four percent interest.
- N5,000 x 0.04 = 0 in earnings (see how to convert percentages and decimals).
- Account balance after one year = N5,200
Nonetheless, interest earned on your account is calculated daily by most banks and then added to the account periodically e.g monthly, quarterly, etc. You’ll usually get a notification for this transaction. This method is called compounding or compound interest, and has more advantage for the saver because your account balance grows faster and the changes are easily visible. Compound interest is simply interest earned on top of the interest you earned previously.
Example: You deposit N5,000 in a savings account that pays a 4% annual interest rate compounded monthly for 2 years.
- Compound interest can be calculated manually using A=P[1+(r/n)]^nt
- A=amount you’ll end up with, P=principal, r=annual interest rate (written in decimal), n=compounding period per year; weekly = 52, monthly = 12, daily = 365 or 366.
- t=no of years
- your account balance becomes approximately N5201.6 in the first year, and N5411 in the 2nd year.
The difference might seem small, but this calculation is just for your first N5,000 deposit. With every N5,000, you’ll earn a bit more. As time passes, and as you deposit more, the process will continue to snowball into bigger and bigger earnings If you leave the account alone for longer.
How much you earn in interest depends on:
- Annual percentage rate (APR)
- The type of Savings account
- Volume of deposit
- the duration of your deposit.
Nigerian banks offer varying interest rates for their savings accounts. Currently, the annual interest rate for a regular savings account in Nigeria as indicated by the CBN is 1.25% beginning from September 2020. Although, there are high-interest savings account which pay up to 4.25% annually.
Apparently, some banks offer considerably higher annual rates on their savings product more than others, and they set varying conditions for earning your interest. A good number of banks require a minimum deposit and for some others, making more than 2 withdrawals in one month will disqualify you from earning any interest. While others still, permit as much as 4 withdrawals in a month.
In order to make the best choice, I’ll advise you enquire directly from your bank of choice and read carefully the terms and conditions of any savings account before opting – in.
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