What Is A Savings Account?
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A Savings Account is an account opened with a bank to deposit that part of our income which we decide to not invest and also don’t want to keep it in our hands. The money is deposited in that account and we get regular interest on it. Savings Account interest rate is usually negligible, but most people don’t deposit money in this account for the sake of earning interest out of it, but more for its safety and easy withdrawal characteristics. Most banks charge monthly fees if you fail to maintain the minimum balance as defined by them in your account. You get debit card and cheque facilities with this account.
- Characteristics of Savings Account
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The biggest advantage of it is the safety. People are usually assured of their money being safe once they have deposited it in their bank accounts. These accounts are highly liquid in nature i.e. You can withdraw and deposit money in a hassle-free manner. They try to inculcate the habit of savings in people and are usually very successful in it. They provide lower interest than most other investment types and are hence not suggested for use in the long term.
- How to calculate the interest on our deposits?
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We get a certain return on our deposits in savings account. This gets accumulated and we get a bit more than the amount we had deposited. The deposit is similar to lending to a bank which, in turn will use it for investing or for lending it to its customers.
For calculating the interest due, we need to consider the following factors –
- The principal amount that we have lend to the bank, denoted by the letter ‘P’.
- The factor of your annual rate of interest (r), denoted by the letter ‘i’.
- The time period for which interest is to be calculated, denoted by the letter ‘t’. It can be considered on a daily, monthly, quarterly or on yearly basis.
- ‘n’ is the number of times for which interest is calculated in a year.
Interest on a savings account is calculated on compounded basis rather than simple basis. This means that the interest earned tomorrow will be added to the principal for calculating the interest for the next day. The time span of compounding differs from bank to bank and it can be daily, monthly, quarterly or yearly. Here is the formula for compound interest –
- A = P (1 + i) ^ nt
- A = P (1 + r/n) ^ nt
Suppose, you deposited £1000 in your bank for a year. Interest is calculated quarterly and the rate if interest is 6%. Therefore the formula will stand at –
- A = £1000*(1+0.06/4) ^4*1
So the extra £61.36 is the interest that you have earned on the deposit.
Factors which determine interest rate
- Government Regulations
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The interest rates are determined by the regulations issued by the bank. They provide a ceiling and a floor limit which the banks must follow. If the interest rates of the head bank declines, it will automatically lead to a reduction in the interest rates on savings account and vice-versa.
- Supply and demand of money
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If banks need more cash for investment, they will automatically be willing to pay a higher interest so as to attract more customers and higher deposits. Similarly, if they want to reduce the money flowing to them from these deposits, they will reduce the rates immediately.
Setting up a savings account is an easy job. You can go to the bank or make an application online with the required documents and get the account ready in few days. You can deposit or withdraw from any of the ATMs using your ATM card and live without the fear of losing your hard earned cash by depositing it in the savings bank account.