How Does Savings Account Interest Work? Here’s Your Guide

By Ruchi Gohri
  | Published: 03 June 2021
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What is a Savings Account?

A savings account is a deposit account that keeps your finances organized and safe in a bank or any financial institution. 

Benefits

Ease of Transaction:

A savings account not only secures your savings but also provides you the ease of transaction in the UAE. You can make a limited number of withdrawal transactions on your account but the deposit limit on this account is usually decent. Though it is more stringent about the withdrawals than the current account, its liquidity is much better than other deposit accounts.

Keeping track of the transaction:

One of the many benefits of a savings account is that you can keep an eye on your transactions and regularly consider your expenditure. This allows you to save more money on your savings account.

Offers from bank

Banks in UAE offer a variety of offers on opening a savings account. As a smart customer, you should carefully compare the best savings account offers on various banks before settling for it.

Interest Rate

The most significant benefit of a savings account is that it provides a decent interest rate on your savings. Though the interest rate is less than a fixed deposit account, it still betters the interest rate offered on other accounts. The interest rates on savings account in UAE vary according to the banks. You may find it useful to compare the bank offers and interest rates on policybazaar.ae

How does Interest Rate work?

Understanding how the interest rate works in UAE helps you in determining the amount bank will pay you for your deposits. While determining this amount, there are two things you need to consider: firstly the interest rate, and secondly how often interests compound. While the interest rate on your savings account is lucid, the time of interest rate on the deposit might create confusion. 

Impact of Compounding Interest

Compounding Interest is an extremely beneficial method of earning more profits. However, it usually escapes our attention. In simple words, compounding interest is the interest received on the interest. While simple interest only considers principal amount, the compound interest also takes the interest earned into consideration while assessing annual or total interests.

For example, if you deposited AED 10,000 in your account with an annual interest rate of 1% and you do not deposit or withdraw any more money and the interest rate does not change, you will AED 100 in the first year. If you do not borrow any money from the same account, every year, you will earn interest on that interest increasing your balance. So, in the second year at the same interest rate, you will receive an interest of AED 101. Consider this:

Year

Interest earned at 1% per annum

Total Investment

Total Amount

1

AED 100

AED 10,000

AED 10100

2

AED 101

AED 10,100

AED 10201

3

AED 102.01

AED 10201

AED 10303.01

4

AED 103.03

AED 10303.01

AED 10406.04

5

AED 104.06

AED 10406.04

AED 10510.1

6

AED 105.011

AED 10510.1

AED 10615.11

7

AED 106.15

AED 10616.11

AED 10722.26

8

AED 107.22

AED 10722.26

AED 10829.48

9

AED 108.29

AED 10829.48

AED 10937.77

10

AED 109.37

AED 10937.77

AED 11047.14

The compound interest will become more favorable if you set aside money for your savings account monthly. Let’s say that every month you deposit AED 5000 in your savings account at the interest rate of 1%. At the end of every month, you will receive an interest of 0.0833% on your savings earning AED 4.165 on your savings every month. While this amount is not hefty, it is a beneficial amount considering the bank applies compound interest on your loans and credit cards as well.  

Things to consider while checking interest rate

Before opening the savings account, you may compare the best savings account offers provided by the bank at policybazaar.ae. However, do not forget to check the interest rates offered by the bank. More importantly, after learning the importance of compound interest, it might be useful for you to also check how often the interest compounds. While some banks compound interests in 6 months, others do it annually. Relating the interest rate with the time of compounding interest will give you an idea about the actual benefits of your savings account. 

Once you have understood how savings account interest works, you can maximize your profits on your savings. 

Ruchi Gohri
Ruchi Gohri12 Posts

Senior Content Writer | She has a penchant for writing and with over 5 years of experience, she plays around with words elegantly, crafting simple content for all to read. In her free time, she loves her couch either to read or catch on to her sleep.