4.13.2015

Is This How to Compute Savings Account Interest?

By Nora
This QUESTION about how to compute savings account interest was posted in our Comments section:

Hi Admin, let's say I have P10,000 in my savings account, is the interest based on what is saved in my account?
So my interest is 10,000 x 0.25% = 2,500, so now I have 12,500 because of the interest?
Am I right?

ANSWER:

No, sorry, that's NOT how interest is computed.
That's too big an interest for a short time.

0.25% is NOT a daily or monthly interest rate.
It's an interest rate for the whole year.

Huh! That low? Yes, that low.

Besides, 10,000 x 0.25% results to 25, not 2,500
You forgot the %.
0.25% means 0.0025
It should be 10,000 x 0.0025 = 25.

Banks can vary how they compute interest and in when they post the interest, as long as they comply with accounting and banking rules.

So How Do Some Banks Compute Savings Account Interest?

Let's use your example. You deposited 10,000 pesos on the first day of the month and your 10k pesos remained in your account until the 31st of the month.  Your ANNUAL interest rate is 0.25%

1. First, let's compute the daily interest rate:
Your DAILY interest rate is 0.25% divided by 360 days.
0.0025 divided by 360 days
0.0025 / 360
0.00000694
Your DAILY interest rate is 0.00000694

2. Let's compute the interest for 1 month or 31 days:

10,000 pesos x 0.00000694 x 31 days
2.15

Your interest for 1 month or for 31 days is 2.15 pesos.

3. Wait! You have to pay your withholding tax for the BIG income that you earned!
     Let's compute the withholding tax:
How much is the withholding tax rate? 20%
Huh! Yes, 20%

2.15 x 20%
2.15 x 0.20 = 0.43

Your withholding tax is deducted:
2.15 - 0.43 = 1.72

so you get a net interest of 1.72 pesos.

4. So, after all these computations, your TOTAL EARNINGS for the 10,000 pesos you deposited for 1 month is 1.72 pesos

Your balance after the month is
10,000 + 1.72 = 10,001.72 pesos


Is There Another Way Some Banks Compute Interest?

Yes, some use this formula below, and the result is the same as the first result:

10,000 pesos x 0.25% x (31 days/360 days)
10,000 x 0.0025 x (31/360)
10,000 x 0.0025 x 0.0861
2.15 pesos

When Do Banks Add the Interest to Our Money?
Some banks post the interest to your account every end of the month.
Some post every end of the quarter.

Is There Any Other Rule Related to Interest?
Your balance for the day should be equal to or higher than the required minimum daily balance to earn interest.

Is It Worth Depositing Money in the Bank?

Yes, if you can maintain your account.

No, if you're not able to maintain your account.
You'll lose your money to penalties if you're not able to maintain your account.

If you really want to save, and become financially comfortable or wealthy later on, don't be discouraged.
Continue saving.
Keep telling yourself "Saving with the bank is better than ZERO saving".
After you save more money, put your money in time deposit.
Read about mutual funds.
Read about investing in real estate.
Read about buying foreclosed NHMRC or Pag-ibig properties.
You can also read about stocks, and see if you can succeed in stocks.

Standard Chartered shows here How to Compute Bank Interest

BPI Savings Account Without Maintaining Balance -- BPI Easy Saver
Savings Accounts for Kids

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