A savings account is often the first place people turn to when they want to keep their money safe and accessible for everyday expenses while earning some interest on their balance. It allows you to deposit money, withdraw funds whenever needed and earn interest without worrying about market fluctuations or long lock-in periods, making it useful to have alongside other investments.
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Most savings accounts also offer decent interest rates. It is usually calculated on a daily closing balance and can range between 2.50% to 7% or sometimes even more. Some banks can offer rates quarterly, others monthly, while many also follow a tiered structure to determine the rates.
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Understanding how these may compound your money can help you save a little more than usual.
If you keep Rs 5 lakh in a savings account for 12 months, the interest you earn will depend on the bank's interest rate and how it applies that rate to your balance.
Scenario 1: Savings account offering 2.50% p.a., compounded monthly v quarterly
Assuming you maintain Rs 5 lakh throughout the year and interest is reinvested monthly or quarterly:
Details | Monthly compounding | Quarterly compounding |
Initial deposit | Rs 5,00,000 | Rs 5,00,000 |
Annual interest rate | 2.50% | 2.50% |
Compounding frequency | 12 times a year | 4 times a year |
Interest earned in 12 months | Rs 12,738.54 | Rs 12,618.39 |
Final balance | Rs 5,12,738.54 | Rs 5,12,618.39 |
In this assumed scenario, it can be seen that monthly compounding earns approximately Rs 120 more over one year than quarterly compounding.
Scenario 2: Savings account with tiered interest rates
Balance slab | Interest rate | Interest for one year |
First Rs 2,00,000 | 2.50% | Rs 5,000 |
Next Rs 2,00,000 | 3.00% | Rs 6,000 |
Next Rs 1,00,000 | 3.50% | Rs 3,500 |
Total: Rs 5,00,000 | Rs 14,500 |
Balance after 12 months: Rs 5,14,500
While the difference between both scenarios may not feel too big, it still helps you to optimise your savings if you understand how your money is compounded. This can be beneficial over the long-term if your corpus grows or if you decide to park your emergency funds in a savings account.
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