Compare High Interest Savings Accounts – Interest on a savings account is the amount of money a bank or financial institution pays a depositor for keeping their money in the bank. Compound interest is interest calculated on the principal and interest earned from previous periods, meaning that your earnings are reinvested and future interest is earned on the higher amount.
In a way, a bank borrows money from its depositors by using the deposited funds to lend to other customers. In turn, the bank pays the depositor interest on their savings account balance, while simultaneously charging their loan customers a higher interest rate than what is paid to their depositors.
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If you reinvest the interest you earned in your savings account and the original amount deposited, you’ll make even more money in the long run. This process of earning interest on your savings plus earning interest on all interest accumulated from previous periods is called compounding. Investors can use the concept of compound interest to build their savings and build wealth.
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Interest on savings accounts is expressed as a percentage. For example, let’s say you have $1,000 in the bank; the account can earn 1% interest. Unfortunately, most banks pay less than 1% interest on savings accounts due to historically low interest rates.
In doing a straightforward interest calculation, $1,000 that earned 1% interest in one year would yield $1,010 (or 0.01 x 1,000) at the end of the year. However, this calculation is based on simple interest, paid only on the principal or deposited funds.
Some investors, such as retirees, can withdraw the interest earned or transfer it to another account. Interest payments act as a form of income. If the interest is withdrawn, the depositor’s account will earn
However, with interest rates being so low, many depositors may choose to leave the interest earned in their savings accounts. As a result, the money in the savings account would gain
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In savings accounts, interest can be compounded, either daily, monthly or quarterly, and you earn interest on the interest earned up to that point. The more often interest is added to your balance, the faster your savings will grow.
Using our $1,000 example from earlier and applying daily compounding each day, the amount earning interest grows by 1/365 of 1%. At the end of the year, the deposit has increased to $1,010.05 against $1,010 with simple interest.
Sure, an extra $0.05 doesn’t sound like much, but at the end of 10 years, your $1,000 would have grown to $1,105.17 with compound interest. A 1% interest rate compounded daily for 10 years has added more than 10% to the value of your investment.
Again, the amount earned still may not seem like much, but consider what would happen if you could save $100 a month and add that to the original $1,000 deposit. After one year, you would have earned $16.05 in interest, on a balance of $2,216.05. After 10 years, still adding just $100 a month, you would have earned $725.50, for a total of $13,725.50.
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While the amount is not a fortune, it is a reasonably sized rainy day fund, which is one of the main purposes of a savings account. When money managers talk about “liquid assets,” they mean any holdings that can be turned into cash on demand.
It is, by definition, safe from fluctuations in the stock market and real estate values. In real people’s terms, it’s an emergency fund that can be used for unexpected expenses like medical bills or car repairs.
To truly understand the snowballing effect of compound interest, consider this classic test case, performed by none other than Benjamin Franklin. The scientist, inventor, publisher and Founding Father was a bit of a showman, so it must have given him a laugh to start an experiment that wouldn’t yield results until 200 years after his death in 1790.
Benjamin Franklin gave an example of the power of compounding – called a snowball. The $4,500 he left to each of the two American cities exceeded the rate of inflation over 200 years.
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In his will, Franklin left roughly the equivalent of $4,500 each to the cities of Boston and Philadelphia. He determined that it would be invested at 5% annual interest for 100 years. Three-quarters of it would then be spent on a worthy cause, while the remainder would be reinvested for another 100 years. In 1990, the Boston fund had about $4.5 million while the Philadelphia fund had about $2 million due to the effects of compound interest.
Franklin’s experiment showed that compound interest can build wealth over time, even when interest rates are at rock bottom. If you’re thinking about opening an account, it’s quick and easy to find the current fees banks are offering by going online. Some banks specialize in high-yield savings accounts.
The best savings accounts include those offered by banks where the interest on the account is compounded daily and no monthly fees are charged. Banks often state their interest rates as the annual percentage yield (APY), reflecting the effects of compounding. Note that APY and Annual Percentage Rate (APR) are not the same because APR does not include compounding.
Compounding is interest on your interest, or the reinvestment of accumulated interest from previous periods. Simple interest is paid only on the principal or deposited funds.
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Investors can use the concept of compound interest to build their savings and build wealth. If you reinvest the interest you earned in your savings account and the original amount deposited, you’ll make even more money in the long run.
Depending on the type of account or product, interest is usually compounded monthly, quarterly or annually. Interest can also be compounded weekly or daily.
Unlike Benjamin Franklin, most of us have no desire to test what our savings might be worth in 200 years. But we all need to have some money set aside for an emergency. Compound interest, combined with regular contributions, can add up to a nice emergency nest egg.
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The offers presented in this table are from the partnerships from which you receive compensation. This offset can affect how and where listings appear. does not include all offers available in the market. Everyone needs a savings account in Singapore. Savings account benefits vary from bank to bank in terms of interest rates, fees and various features to attract depositors.
This is where composition works. Usually for savings accounts, the interest rate is 0.05% which is credited at the end of each month.
0.05% will be below the inflation rate from year to year. Although it sounds counterintuitive, you’re actually losing purchasing power to inflation when you keep your savings in a basic savings account.
Editors Note (July 14): The savings account used above for OCBC refers to the Frank OCBC account. There is no monthly service fee for account holders under the age of 26. For account holders 26 and older, a $2 monthly service fee applies if the monthly balance falls below $500.
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A differentiating factor that different savings accounts have is the features they offer either in their app or online portal. Some have tools for you to visualize your personal financial health. For example, Maybank can remind you to pay your bills via SMS.
For OCBC, they weigh your assets against your liabilities (if you get a loan with them). POSB allows you to see your balance in terms of a bar graph after logging in.
Most banks offer Touch ID login for quick access. POSB’s DigiBank app has an interesting feature that allows you to swipe to view your bank balance without logging in. If most of the time you just want to check your bank balance and nothing else, POSB might be your favorite savings account because of this feature. Maybank offers SMS reminders for bills, so you won’t get late payment charges just because it’s out of your mind.
Given the low interest rates that savings accounts offer, it’s not a good idea to let your savings depreciate against inflation. While it is a better alternative to invest savings, we still need to have some funds in savings accounts for our daily expenses. When choosing your savings account, it’s best to look for features that make managing your day-to-day money easier
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