Saving money isn’t always an easy task. However, if you’re saving towards a goal, whether it be for a deposit on a home loan, a car or a holiday, a high-interest savings account can help you to reach your goal sooner.
How interest is accrued
To calculate savings interest, you’ll first need to consider how often interest is calculated and paid, in addition to the rate of interest paid.
Simple interest is interest paid on the original amount invested. The amount of simple interest on any principal is calculated by multiplying together the principal and rate of interest by the amount of time you save in an account.
For example, if you deposit $1,000 into an account paying a rate of 2 per cent per annum, 12 months later you would have accrued $20 interest (assuming you didn’t make any withdrawals from the account).
Compound interest, on the other hand, is described as ‘interest on interest’.
To continue the above example, at the end of the first year, your balance would have grown from $1,000 to $1,020. So you would then earn 2 per cent of $1,020 rather than 2 per cent of $1,000. (Again, this assumes you haven’t made any withdrawals.)
Whether you earn simple interest or compound interest, if you’re serious about saving, the interest you earn can really add up, particularly if you make regular deposits to the account.
For example, if you put an initial $2,000 into a savings account at a rate of 5 per cent and deposit $400 each month, you could have $17,424 saved within three years, so long as you don’t make any withdrawals. A total of $1,424 of that amount would be interest you have earned.
What you need to know
To work out how long it will take to reach your savings goal, use RateCity’s savings account calculator.
To calculate savings interest you’ll need to know how much you will be starting with, how much will be put into the account each month and what interest rate you will be offered. Having a goal will help too!
For example, if you want to save at least $10,000 within three years and you’re starting from scratch, then you’ll need to deposit around $300 per month into a savings account paying 5 percent interest p.a. At the end of the period you’ll have more than reached your goal with $11,326 banked (minus any fees and charges and tax) so long as you don’t withdraw money.