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Understand interest on savings

Why interest matters

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.

Choosing the right savings option often requires a balancing act between the interest rate offered and the terms and features it comes with. For example, some savings accounts offering higher interest rates may require you to:
  • keep your savings in place for a defined period

  • give notice to access your savings

  • invest a minimum (or maximum) sum each year or specified period

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

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.

For example: Let's say you invest SGD10,000 into an account paying 1.20% annually. After one year, you'll earn SGD120 interest. By the end of the third year, you would have SGD364.34 (because you earn interest on the total balance that already includes interest earned in the first two years). 
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
For example: Let's say you invest SGD10,000 into an account paying 1.20% annually. After one year, you'll earn SGD120 interest. By the end of the third year, you would have SGD364.34 (because you earn interest on the total balance that already includes interest earned in the first two years). 
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.

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