Savings Account Interest: Monthly or quarterly interest—check where you can get higher returns on your money..
Savings Account Interest: Banks pay you interest for keeping money in a savings account. Many of you likely have a savings account, yet few pay attention to when the interest is actually credited to the account. Imagine sitting with a friend who is financially savvy; while comparing expenses, you open your banking app. Until that moment, you might not have even known when interest is added to your account. You then discover that your respective banks credit interest differently.
Interest is credited to your friend's account every month, whereas in your account, it is credited every three months (quarterly). Initially, this might not seem significant. However, upon calculation, you realize that despite having the same balance, your friend earns more money. Money kept in an account earns interest, and it is crucial to know how frequently this interest is added to your balance. This is because the interest added to your balance compounds over time.
Monthly vs. Quarterly Interest: Understanding the Difference
Most banks credit interest on savings accounts on a quarterly basis, though some do so monthly. Monthly interest credit simply means that the interest earned on your savings account during a given month is added to your account that same month. Consequently, you will see slightly more money in your account each month compared to the previous one.
How the Compounding Formula Works
According to Rohit Garg, Co-founder and CEO of Olyv, the interest rate is always the primary factor determining returns. However, the frequency of interest credit determines how quickly you start earning new interest on those returns.
When interest is credited frequently, you begin earning interest on the previously earned interest sooner. Souvik Biswas, Head of Research at Bajaj Capital, explains that this is the true benefit of compounding. If interest is credited to your savings account every month, the amount earned is added to your principal. Subsequently, you earn interest on this increased amount. Simply put, with monthly payouts, you start earning "interest on interest" sooner compared to quarterly payouts.
**How the method of interest credit makes a difference**
If the interest rates offered by two banks are identical, you gain a slight advantage with monthly credits compared to quarterly ones. While this difference might seem negligible in the short term, maintaining a substantial balance over a long period turns this small benefit into a significant sum.
Let’s illustrate this with an example. Suppose two friends each deposit ₹3 lakh in their bank accounts. One bank credits interest monthly, while the other does so quarterly. Both accounts earn an annual interest rate of 3%. After three years, the account with monthly credits would hold ₹3,28,251, whereas the account with quarterly credits would hold ₹3,28,142—a difference of ₹109.
If the interest rate were 4%, a balance of ₹3 lakh would grow to ₹3,38,181 after three years with monthly compounding, compared to ₹3,38,047 with quarterly compounding. In other words, without any extra effort, the monthly credit account yields ₹134 more. However, even a 1% difference in the interest rate has a massive impact; in the first year alone, you could earn approximately ₹3,000 more. Banks such as Bandhan Bank, IDFC First Bank, RBL Bank, Utkarsh Small Finance Bank, Ujjivan Small Finance Bank, and Jana Small Finance Bank offer interest rates of up to 7% with monthly interest credits.
Disclaimer: This content has been sourced and edited from TV9. While we have made modifications for clarity and presentation, the original content belongs to its respective authors and website. We do not claim ownership of the content.
