Understanding Savings Account Interest Rates

2007-03-08 10:33:40

( Financial )



Savings account interest rates are quite easy to understand. Generally, these rates dictate the amount of interest you gain from depositing your money in a savings deposit account. This is because the financial institution that handles your money will use it for its own investment ventures.

Understanding savings account interest rates can help you obtain the best savings interest rates. Different financial institutions offer different savings account interest rates.

These interest rates are generally based on the economic conditions, the type of the savings account, the account’s liquidity, the initial deposit required, the maintaining balance, your average daily balance, and the relative risks involved in your particular type of account.

Savings account interest rates vary across the various types of savings accounts available. Savings accounts include but are not limited to ATM accounts, checking accounts, simple passbook savings account, time deposit accounts, and money market accounts. Since ATM accounts, checking accounts and passbook accounts are usually more flexible and more liquid, they fetch lower interest rates. Money market accounts require a steeper minimum deposit and average daily balance and are less liquid than the previous three. Money market accounts come with more restrictions in terms of withdrawals. Time deposits on the other hand promise very competitive savings account interest rates if you agree to tie up your money for a much longer period of time.

From a linear point of view then, it would seem that you may just leave your money in the bank for as long as you can manage and then reap the best savings interest rates. But you might then be missing the forest for the trees. Remember that if you tie up your money in a savings instrument, you are incurring opportunity costs. You could have used your money in a different way to earn you much more than you are currently earning on it. And you also have to factor in inflation. By the time you get your time deposit back, it may have nominally grown larger but its true value may actually be less than your original principal.


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