More interest for your Savings Account

After a long pestering from this guy - who never gives up on me to contribute to his blog... here I am with my first post...and to be honest...am really excited about it :)

We have been hearing about the changes in the interest computation of our deposits in Saving Accounts. Here is an article by Uday Dhoot, CFP^CM, CIPM is a financial planner and COO at International Money Matters who has explained it very lucidly about how you're going to benefit from it. I found it very informative and simple to understand. However, how are the banks going to set-off this additional expense is still unclear and under scanner. Whether the banks increase the minimum balance limit for depositors or increase the annual cherges is for us to wait and watch.

More interest for your savings account

Idle money never has worked better for you. Your deposits lying in your Savings Bank Account will work better for you now than they did earlier. Effective April 1^st 2010 the RBI has issued an announcement by changing the terms of interest calculation for Savings Bank account deposits. The new method is a substantial departure from the old practice, whereby interest was calculated on the minimum balances held in these accounts from the 10th of each month to the last day of the same month.

In the older method, interest was calculated at 3.5% p.a on the minimum balance between the 10^th and the last day of the month. However, effective April 1^st 2010 this model has changed to interest payable on the “balance on a daily basis”.

This method of calculation is a paradigm shift from the conventional method of calculation that awarded the bank account holders with meagre interest earnings.

The change in interest payable is as illustrated below:

If one were to go by the older method of interest calculated at 3.5% p.a on the minimum balance between the 10^th and the last day of the month. The interest workings were calculated on the Rs 10,000 balance that was the minimum between the 10^th and the 30^th of the month.

However in the new system of calculation, interest is calculated on a daily basis thereby giving the depositor almost twice the amount of interest. With the interest amounts almost doubling it will provide a better cushion for the conservative investor who prefers the virtually risk free bank deposits to any other investments.

However in a rising interest regime; this move is more than what one could ask for- liquidity and higher interest. But don’t make this a reason to be lazy- Invest your money according to your goals and your time horizon. Keep 2-6 months expenses as emergency funds in a combination of Bank accounts and liquid funds. Don’t let that money be idle, even though it is better than before.