How Bank Interest Rates Work On A Savings Account? Here’s A Mini Guide

Ever since young, we have learned to save up money and stash it away in a savings account. But did you know there’s another way to save money and earn even more money? The answer: leveraging interest rates on savings accounts.

Understanding how interest works on a savings account is important to help you maximise the earnings on your hard-earned cash.

What are bank interest rates?

Fixed Deposit is a great conservative asset class, suitable for people who are just about to get their feet wet in the realm of investing.

Generally, an interest rate is a portion of your money that the bank is promising to give you every year simply because you chose them.

Therefore, a 3% interest rate means that the bank will give you 3% of the total amount in your balance every year. Let’s say your bank account has RM20,000, your bank is promising to give you RM600 every year. Sounds like easy, “free money,” right?

This is a conservative way to invest your money, and is a tactic used by banks to retain you as a customer. Interest rates also act like an incentive to push you to continue to save more in your bank account.

And the higher the interest rate, the more free money you get. So it’s up to you to pick a bank with the highest interest rate.

In Malaysia, banks will offer to hold your money with two products: a Savings Account or a Fixed Deposit (FD) Account.

Related: Use These 7 Cash Tricks to Grow Your Savings

How do bank interest rates work?

FDs runs on the concept of compounding interest.

Simply put, interest is the cost of borrowing money. So you’ll pay interest to borrow money, and you can collect interest when you lend money.

The same concept applies to these accounts. When you put money in a savings account, the bank is technically borrowing the money and paying you interest in return.

The idea is based on the concept of compounding interest, a fundamental principle in investing which allows one to earn more when the interest that they’ve earned on a balance in a savings or investing account is reinvested.

Typically, you can accrue daily, monthly, or quarterly interest, and the more frequent it is added to your balance, the faster your savings will grow.

Related: Here Are 7 Smart Ways To Invest And Grow RM10,000

Savings Accounts vs Fixed Deposits

Generally, savings accounts don’t offer much in interest. Alternatively, FDs offer better interest rates but are less flexible.

A Savings Account functions like a Current Account—you use it to save your money and you get a debit card that allows you to withdraw money at any time.

The big difference between a Savings Account and a Fixed Deposit is in the interest rate. The former is typically lower ranging from 0.05% to 4.38% per year, but an FD offers higher interest rates depending on the banks. People often use FDs for long-term investments such as a house deposit, retirement or a big purchase.

However, unlike a Savings Account, you don’t get the freedom to withdraw your money at any time, and the tenure depends on the account you invest in. Some accounts can be as little as six months, others may last as long as five years.

The investment term and interest rate are fixed for an FD, so it’s much easier to calculate the return you’re expecting. But because of this, you’ll also need to fork out much more for the initial deposit, with many FDs requiring at least RM1,000 to start.

Why do Fixed Deposits or bank interest rates matter?

Being strategic with how you save your money would help you grow it more efficiently.

If you grew up with the general belief that you should save aggressively and spend conservatively to build your wealth, then that same concept may not necessarily work anymore.

Though saving consistently is still very important, you need to do so much more to build your wealth for the long-term.

On top of putting aside money each month, you’ll need to invest your money and ensure that you are investing at a higher rate than the rate of inflation for real impact.

Benefits of Fixed Deposits

• Investment returns is pretty much guaranteed
• Encourages savings
• Capital and returns are insured under the Perbadanan Insurans Deposit Malaysia (PIDM)
• Safe investment
• Liquidity

Cons of Fixed Deposits

• Flexibility

Alternatively, how do Shariah-compliant Fixed Deposits work?

Islamic Fixed Deposit-i or commonly referred to as Islamic FD is fundamentally different than its conventional peer. An Islamic FD has a predetermined profit sharing and Murabahah, or cost plus, which is an Islamic financing structure whereby the seller and the buyer agree to the cost and markup of an asset. The point of this is to remove any financial uncertainty.

This concept let’s investors generate returns from their funds without involving interest—in accordance to the principles of Shariah, which strictly prohibits the payment or acceptance of interest (riba).

This Shariah-compliant instrument provides an alternative to investors who are looking for an Islamic and ethical way of investing in Fixed Deposits without compromising their beliefs.

What are you waiting for? Apply for a CIMB Fixed Rate Income Account-i (FRIA-i) account for your business today to enjoy a special 2.2% returns.