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You achieve a return on your savings in the form of savings interest . The bank expresses the savings interest as a percentage. You receive this percentage on an annual basis and apply if your savings balance were to be the same throughout the year. In reality, the balance on your savings account will probably change regularly due to deposits and withdrawals. The bank also usually adjusts interest several times a year. The bank takes this into account when paying interest. But how does the bank calculate the amount of interest you receive?
Banks look daily at the balance in your savings account and calculate the interest that you receive based on this. Every day you receive 1 / 365th part of the interest rate that applies to your savings account at that time. You will of course receive 1 / 366th part in a leap year. In the example below you can see exactly how the interest calculation works.
Example: At the start of the year, your savings balance is 10,000 euros. You will receive 1.8 percent interest on this. You deposit 1,500 euros into the savings account on 1 April. On 1 June, the bank lowers interest rates to 1.6 percent. Finally, you withdraw 1,000 euros from your savings account on 1 October. The interest calculation is then as follows:
|Interest calculation||Received interest|
|January 1 to March 31||10,000 euros||90 days||10,000 * (90 * (1.8% / 365))||44.38 euros|
|April 1 to May 31||11,500 euros||61 days||11,5000 * (61 * (1.8% / 365))||34.59 euros|
|1 June to 30 September||11,500 euros||122 days||11,500 * (122 * (1,6 / 365))||61.50 euros|
|October 1 to December 31||10,5000 euros||92 days||10,500 * (92 * (1,6 / 365))||42.35 euros|
|Total interest received||–||–||–||182.82 euros|
Note: This is of course a simplified representation of reality. In reality, the bank changes the interest rate several times a year and the balance on your savings account is also likely to change more often.
In the example above, the bank pays the interest once a year. However, there are also banks that pay the interest per quarter or per month. In that case there is an interest-on-interest effect. You also receive savings interest on interest payments received earlier. As a result, the amount that the bank pays in total in interest is higher.
In addition, savers who save at a foreign bank may have to make use of value dating. This means that the deposit on your savings account only counts on the following day. This means you will miss out on one day interest. Not a disaster of course, but it ensures a different calculation. As stated, this only applies to savers who save at a foreign bank.
Do you save on a deposit? Then you may not deposit or withdraw any amounts in the meantime. Moreover, a deposit has a fixed interest rate. The interest calculation of a deposit is therefore a lot easier.