If your goal is to earn as much as possible on the money you save, then there are things you need to know about savings accounts and interest rates.
Interest rates on savings, known as annual percentage yield (APY) should not be mistaken for interest rates on consumer loans, typically quoted as the annual percentage rate (APR).
APR is the rate of return that lenders demand for the ability to borrow their money.
APY, on the other hand, is the interest rate that is earned at a bank or credit union from a savings account. This interest rate takes compounding into account.
Variable vs. Fixed APY
There are two types of APY; the variable and the fixed. Savings or current accounts may have either a variable APY or fixed APY.
As their names imply, a variable APY is one that fluctuates and changes with macroeconomic conditions, while a fixed APY does not change – or changes much less frequently.
One type of APY isn’t necessarily better than the other. While locking into a fixed APY sounds appealing, consider periods when the Central Bank of Nigeria is raising rates and APYs increase each month.
Most current, savings, and money market accounts have variable APYs, though some promotional bank accounts or bank account bonuses may have a higher fixed APY up to a specific level of deposits.
How to calculate interests on a savings account
To many savers, calculating APY is seen as a technical process, but nairaCompare is here to break it down for you.
APY uses a formula to combine the interest rate and the frequency that it’s applied.
Basically, there are two types of interest rates; simple and compound interest.
Simple interest, also called nominal interest, is paid only on the money that you have deposited into your account, and not on your account’s earnings (interest payments).
For example, if you earn 3%pa interest on N100,000 that you have in a bank account, this means you get paid N3,000 per annum interest.
Compound interest on the other hand is when the interest on your money earns interest. The interest earned is added to your balance on a regular basis causing it to earn interest.
So not only does your money earn interest, your interest earns interest too!
For example, using an interest rate of 3% per annum paid monthly. If you invest N100,000 and do not intend to add any more money to the account. At the end of the first month, you’ll have earned interest of N3,000.
Therefore, for the month of February, interest will be calculated on N100,300.
By the end of the year, your total balance will be in multiples of interests.
Compound interests are a great benefit of having savings accounts!
Tips on how to save money
Making the decision to save money is never an easy one. With mounting bills and an increasing cost of living, it takes a lot of discipline to set money aside periodically.
However, by observing the following tips, you may just be on your way to meeting that savings target.
Build an emergency fund
Research has shown that saving money helps people lead happier lives, but what happens when you meet with an emergency? Do you just dip into your savings?
As you embark on your saving journey, where you can, also set aside a little extra for emergencies. It could be delay in salaries, medical emergencies, vehicle repairs or any other thing that requires urgent funds.
Establish your budget
To do this, you will have to monitor your spending habits. As a new month begins, get a receipt for everything you purchase throughout the month.
Stack the receipts into categories like restaurants, groceries, and personal care. At the end of the month, you will be able to clearly see where your money is going.
Seeing what you spend in total can help you know what expenditure to cut down on and channel into your savings accounts.
Budget with cash
This is for those who have trouble with overspending. Try to develop a budget system where you use a set amount of cash for most spending.
And once the cash is gone, it’s gone.
Save for a goal
Don’t just save money, save for your future. Yes, there is a difference. Don’t simply spend less. Save with a purpose.
Your saving goal could be anything from getting a better apartment, buying a home, a car or saving to further your studies.
Whatever it is, having a savings goal in mind will help you stick to the plan.
These days, it is possible to automate your savings. With advancements in technology, setting up your account to automatically transfer money into your savings account is possible.
It is also the easiest and most effective way to save, and it puts extra cash out of sight and out of mind. Automatic savings means you have a process in place to save at regular intervals, whether that’s monthly, weekly, or daily.
Saving your money may seem like a big deal, and that is because it is. However, with a short- term goal you can ease your way in.
Your short-term goals could be anything from buying a phone or a new household item.
Once you reach the short-term goal, you’ll have created a habit of saving. Then you can launch into bigger goals.
Make a savings plan
With a savings plan, you are twice as likely to save successfully.
A savings plan gives you a clear picture of what you want to achieve and how you intend to go about it.
Rewarding yourself with little treats is a way of saying well done.
So yes, as you make progress in achieving your savings goal, once in a while, give yourself a pat in the back.
But make sure it is not something expensive else you might defeat your saving goal.
Bonus saving strategies for saving money
Earning money is difficult, but understanding how money works can be even more so.
From the rising prices of goods and services during a pandemic, the fear of getting laid off or being put on compulsory leave, it is hard to save in these times, yet it is crucial if we’re to surmount the cycle of earning to eating.
There are several ways to reach your money goals and one of those is having the savings account suited to your growth needs.
Some other effective strategies to help you save better are as listed below:
Track spending effectively
To effectively save money you need to be able to accurately track your spending.
In working to meet your money goals, you should have a target. When you have specified a realistic amount to save by a certain date, it gives you a sense of purpose and drive to achieve that goal.
Adopt the 10% rule
Are you confused about how much of your money to save? When in doubt, the rule of thumb is to adopt the 10-percent rule, meaning, save 10 percent of your earnings.
If you regularly save 10 percent of your income, no matter how much you earn, you will always have the confidence of knowing you are living within your means.
Interest rates on savings accounts vary, but they offer a great way to grow your money over time. With competitive rates and no hidden fees, opening a savings account is one of the smartest financial decisions you can make. Start building your future today by exploring our different providers and finding the right one for you!