How Interest Rates Impact Your Savings Account Growth?
A Savings Account is relied upon as a secure locker for your hard-earned money. It is also used as a go-to medium for various offline and online banking tasks. But the growth potential of a Savings Account is often overlooked.
You earn a competitive interest rate on your Savings Account deposit. The interest rate does not match that of fixed-income instruments or the average return rate of market investments. But it does add up to significant interest earnings over time. Hence, consider capitalising on it.
This blog explains how interest rates impact your Savings Account growth:
How do Savings Account interest rates work?
Before exploring the Saving Account interest rate impact
the impact of the Saving Account interest rate on growth, it’s essential to understand its working. Following is a brief description:
All banks have different Savings Account interest rate offerings. The bank considers the Reserve Bank of India (RBI)’s Repo Rate to set its interest rate offering. Thus, the interest rate fluctuates as the Repo Rate is revised.
Once the bank implements the revised Saving Account interest rate, it applies to your deposit. Hence, making a difference to your interest earnings. So, always watch out for the bank’s notification about the interest rate revision.
In addition to the RBI’s Repo, all banks consider their internal funds supply and demand, as well as competitor offerings, to decide on their interest rate. However, it will be fair and competitive each time.
Furthermore, the bank considers the product type to set its interest rate. For instance, the Senior Citizen Savings Account fetches a higher interest rate by default. Special Savings Account options, such as a privilege account, offer higher interest rates compared to others.
When it comes to interest calculations, most banks calculate it based on the daily average closing balance in the account. They calculate the interest daily; however, they credit it to your account every quarter. (Note, this can differ from one bank to another.)
How Do Interest Rates Impact Savings Account Growth?
Now that you understand the Saving Account interest rate and its calculation method, you realise how even a minor revision in them can make a difference to your account growth.
Typically, when the interest rates are moderate to high, it translates to substantial interest earnings for you. Similarly, when the interest rates drop, your interest earnings take a hit.
Furthermore, since the bank considers the daily average closing balance for interest calculation, it impacts the account growth.
If your daily average closing balance is consistently high, you are in a position to earn better interest earnings in comparison to holding a low balance.
How to accelerate your Savings Account growth?
Practical strategies to boost your Savings Account growth:
- Contribute regularly:
When you open Bank Account online, proactively try to contribute to it. Begin with a modest amount and gradually increase your contribution as you gain better control over your finances.
This increases your account balance, indicating an improvement in potential interest earnings. It also helps you become more financially disciplined.
- Refrain from unnecessary withdrawals:
As mentioned, the bank considers the daily average closing balance to calculate interest. So, it’s best to maintain a decent account balance. This may result in interest earnings enhancement.
A way to achieve this is by refraining from making unnecessary account withdrawals or transactions. This means avoiding impulsive spending. This not only helps uphold your balance but also prevents financial drain.
- Opt for auto-sweep in the facility:
In the auto-sweep facility, the bank automatically transfers the Savings Account balance exceeding a threshold into an FD Account.
This way, you get to earn FD interest rates, which tend to be higher than those of a Savings Account. At the same time, you continue to enjoy the flexibility of a Savings Account.
Summing It Up:
You earn a competitive interest rate on your Savings Account deposit. Interest rates vary by bank and account type.
The Savings Account interest rate fluctuates, impacting your interest earnings. A competitive interest rate translates to better interest earnings and vice versa.
Your Savings Account balance also affects your interest earnings, as the bank calculates interest earnings based on the daily average closing balance. Maintain a consistent and significant balance to reap better interest earnings.
