MONEY MATTERS-5

INTERESTING INTEREST

Now you know about Savings, it is natural you would be interested in interest earned on your savings.

Interest is expressed as ‘rate per annum’ . Banks give interest on Savings deposits at 3 per cent per annum - i.e for keeping the deposit for one year, interest is paid at Rs. 3 per Rs.100.

Postal savings give a little higher rate. Fixed deposits with banks offer different interest rates depending on the duration of the deposit. The duration ranges from a few days (say a week) to 3 years generally and beyond 3 years also. Interest rates are announced periodically. Government announces the rates for Government Savings Schemes every quarter. 

Interest may be fixed or variable. Fixed rates offer same rate for entire period of deposit.Variable rates vary periodically based on the changes to the underlying bench mark rates which changes according to market rates.

Interest rates are classified as Simple interest rate or Compound interest rates.

Simple interest rate is the rate that is applied for the entire period of deposit. Where the deposit is for, say, 3 years and interest rate is 3 per cent simple payable at maturity, interest is paid at 9 

per cent for entire 3 years ( 3 x 3 ). Interest may be paid at the end of every year also.

In the case of compound interest, interest is considered every year and added to the principal (the deposit) and second year interest is applied on the increased principal. If Rs. 100 is placed as deposit, interest at 3 per cent is applied on Rs.103. It amounts to Rs.3.09 . So the principal for third year is Rs.106.09. Interest at 3 per cent on Rs.106.09 will be Rs. 3.18. The maturity amount at the end of 3 years is Rs.109.27 as against Rs.109 under simple interest method.

Generally interest is compounded every year.It is possible to compound interest every half year or every 3 months, or even every month.It can be even every day or continuous compounding o which is known as ‘perpetual’ compounding.

We will see more interesting information on compounding in next blog. Till that time, bye.