What Is Interest Rate And How Does It Work?

Putting your money in the bank gives you leverage in your path to financial freedom. Among the advantages it gives is the opportunity for your money to earn through interest rates. But what exactly is interest rate and how does it work?

Essentially, when you deposit your money in a bank, they pay you with interest. Most traditional banks offer interest rates as low as 0.01% and as high as 1%, whereas, at CIMB Bank PH, you can earn interest rates of up to 3.88%. These rates are presented per annum (PA).

If you calculate your earnings on an annual basis using simple interest, it would come off as insignificant. This is a common misconception people often associate with keeping their money in banks. In reality, however, compound interest is used to grow your funds.

Through compound interest, your money earns more each time interest is added. Think of it as a snowball falling down a snowy hill. As it rolls down, it collects snow layering on top of the previous outer layer. By the time it reaches the foot of the hill, it would be twice the size as it was before. In the context of earning interest, this means that the interest that you have earned earns interest.

With CIMB, your savings are compounded daily, this means your money grows at a faster rate. Furthermore, its growth rate wouldn’t be affected even when you often move your money around.

Making Your Money Work For You

Let’s say that you have P25,000 on hand. At the moment, this amount will allow you to get 125 cups of coffee priced at P200 each from your favorite mid-priced coffee shop which will last you for a little over four months. Should inflation go up by 2% the following year, each cup of coffee will now cost you P204. Without growth, you will only be 3 cups short from the cups of coffee you can initially buy with your money.

Suppose you open an Upsave account with your P25,000 at CIMB at beginning of the year. With inflation rising by 2% the following year, your money will be enough to get you 124 cups of coffee. Just 1 cup short from the average number of cups you can buy before prices went up.

Following the snowball effect, let’s assume that you deposit the P25,000 to your Upsave account at the beginning of the year and deposit P100 every month. By the end of the year, your balance would amount to P26,912.85 which can get you 131 cups of coffee priced at P204 each. Evidently, consistently putting money in the bank, even in small amounts, can still grow your funds at a rate that lets you keep up with rising prices.

If you want to compute how much your savings will earn through compounded interest, you may use this equation:

Net Interest Earned = [Average Daily Balance x No. of days in a month / 360] x Interest Rate P.A. x [1 - Withholding tax (20%)]

Saving You From The Rainy Day Dilemma

Keeping your funds safe in a bank adds value to it. This means that you have fewer things to worry about should a financially damaging phenomenon take place such as inflation where prices of basic commodities rise up. With the added value to your money, you will have a considerable amount of headroom that will allow you to keep up with the rising prices of commodities.

Overall, keeping your savings in a bank not only guarantees your funds to be safe and secure, but it also gives you the opportunity to passively earn from the interest rates they offer.

At CIMB, your savings can earn even more compared to other local banks. Don’t let your funds remain stagnant. Give yourself the gift of financial security. Download the app and open an account now so you can sit back and let your money grow.

Change the way you bank and let your savings take you to financial freedom. Download the CIMB Bank PH app today!