Interest rates on savings: fixed, variable and compound what to consider
When choosing somewhere to put or invest your savings you must consider yourself having something to offer and those who provide options such as savings accounts as potential customers: who is offering you the most and on what terms. For certain investments there is risk involved and you may lose everything, for savings accounts though and similar there is an opportunity cost, the difference between what you get from one option over another.
Your savings should give you the best investment possible and for larger amounts there are some greats savings accounts available which you choose though will depend on what you want but also predicting which will pay you the most. Many accounts will offer a fixed rate: a fixed rate means you know exactly what you will earn each month or each year, a variable rate will be pegged to the official interest rate in your country at any time. Which is best will depend on how much of a gamble you want to take and the current economic conditions. With a fixed rate this is ideal when you want to know you will get a certain amount of interest from the account and don’t want to take on any risk. A variable account means you are risking having a low rate but could get a high rate of interest paid, and this may change over time. Unlike with debt of course savings are much easier to move around if conditions change though you often earn more by leaving amounts untouched in an account for a long period. The economy’s current state is vital for a variable interest account: a higher interest rate is likely when the economy is going into a boom or at least growing rapidly: if the economy looks like it may in fact overheat then a high interest rate is very likely to be announced by either the government or the central or reserve bank in your country. An economy that is slowing down by contrast may need low interest rates to encourage spending and discourage saving so you could miss out.
Another very important consideration with your savings is compound interest. On large amounts the compound interest could be a significant amount. Compound interest is where you earn interest on your interest, not just your original amount. Where interest on your original amount is tens of thousands the interest on that interest may be hundreds if not thousands each year. The way that compound interest if it is paid is worked out varies but it may only be applied annually to the interest from the previous year: you will earn more the more often it is applied.
Fixed or variable rates and compound interest are the main things to consider on a savings account but there are a few other little things. As mentioned you should consider how easy it will be to access your money if you need it. Sometimes you will be totally unable to access it for a certain period of time from deposit, in other cases you will need to leave it for a certain time before earning higher interest. If you want to take money out from time to time a more classic account may be what you want: still though some take longer to get money from and a request has to be made and a transfer will be made to another account within a few days or even a few weeks. This is fine for savings but not ideal if you want to have the account for general use as well and you will need a current account that you occasionally move money into.
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