When you put money into a savings account, you bank or financial institution will reward you with a percentage of the money you saved in return for keeping your money with them. This is called interest. It's important to know how much interest you get from your savings account.
Interest helps you grow your savings. The higher the interest rate you get on your savings, the faster those savings will grow. Look for accounts offering an interest rate that's higher than the rate of inflation, where available, which is the rate at which the price of goods and services increase. Otherwise, the real value of your savings may decrease. And remember that you may have to pay tax on the interest you earn.
By contrast, flexible savings accounts with instant access to your money 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 fund, it's important to choose an account that allows you to immediately access to your money. 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 is interest earned on previously earned interest. The longer you save, the more the interest you earn compounds. Since your compound interest quickly mounts up, your savings can significantly increase over time.
| Year | Principal | Yearly interest | Total interest |
|---|---|---|---|
| 1 | SGD10,000.00 | SGD120.00 | SGD120.00 |
| 2 | SGD10,120.00 | SGD121.44 | SGD241.44 |
| 3 | SGD10,241.44 | SGD122.90 | SGD364.34 |
| Year | 1 | 1 |
|---|---|---|
| Principal | SGD10,000.00 | SGD10,000.00 |
| Yearly interest | SGD120.00 | SGD120.00 |
| Total interest | SGD120.00 | SGD120.00 |
| Year | 2 | 2 |
| Principal | SGD10,120.00 | SGD10,120.00 |
| Yearly interest | SGD121.44 | SGD121.44 |
| Total interest | SGD241.44 | SGD241.44 |
| Year | 3 | 3 |
| Principal | SGD10,241.44 | SGD10,241.44 |
| Yearly interest | SGD122.90 | SGD122.90 |
| Total interest | SGD364.34 | SGD364.34 |
Because of the effect of compounding, the earlier you start saving, the more time you have to earn compound interest. It's a good idea to make regular deposits to keep your money growing. Likewise, it's also best to avoid taking money out of your savings account as that reduces the amount of interest you'll earn.
