Perkins
Dennise Williams, Staff Reporter
FOR MANY people, savings accounts are important financial vehicles that provide safety and peace of mind. It can be very comforting to visit your branch, deposit money and have one's bank book updated. And with each deposit the bank balance grows and a deep sense of satisfaction is experienced. Financial institutions accommodate savers by paying interest on their client's savings. But Donovan Perkins, CEO of Pan Caribbean Financial Services says, "Educated savers need to understand how their interest is calculated."
This is an important point that savers tend to overlook. In fact, many savers either have no idea or the wrong idea about how interest is calculated. A National Commercial Bank customer service representative informed Sunday Business that several of her clients think that, "interest of say 2 per cent is paid every day. It is not. The interest is calculated over 365 days."
That's right. But it gets even better, because not only is interest calculated per annum (365 days) but also depending on the financial institution, the interest can be calculated in one of several ways.
1. Interest is calculated daily on the ending balance and paid monthly.
2. Interest is calculated daily on the ending average balance and paid monthly.
3. Interest is calculated daily and paid twice per year.
4. Interest is calculated on ending balance per month and paid twice per year.
5. Interest is calculated daily and paid three times per year.
6. Interest is calculated on the ending balance at year-end and paid at year-end.
7. Interest is calculated on the ending balance held every quarter and calculated on the ending balance per quarter.
The manner of the interest calculation is important because the more often interest is compounded, the more money you earn. Mr. Perkins looks at it this way, "Some institutions pay interest not monthly, but quarterly or even semi-annually. They may also pay interest, which is calculated based on the lowest balance in the account over the period, not the average balance or the daily balance. What these methods do is to substantially reduce the real interest paid to the savings account holders"
In a previous article we looked at the interest rates of several financial institutions. Basically, interest rates are between 1.5 to 9.5 per cent with highest interest rate being paid on amounts of $1 million and over. Also most accounts are tiered, where the more you have on deposit the more interest is paid on your account. For the sake of simplicity, we are going to look at the earning potential for accounts with the interest paid straight (not tiered) before and after taxes. Remember that interest earned is taxed at 25 per cent. Also note that in these examples, we assume a one-time lodgement of the particular sum and that interest is compounded.
Example 1: You save $10,000 at 2 per cent for five years.
If interest is paid yearly, you earn $11,041 before taxes, $10,773 after taxes.
If interest is paid quarterly, you earn $11,049 before taxes, $10,777 after taxes.
If interest is paid monthly, you earn $11,051 before taxes, $10,778 after taxes.
If interest is paid daily, you earn $11,052 before taxes, $10,779 after taxes.
Example 2: You save $100,000 at 5 per cent for five years.
If interest is paid yearly, you earn $127,628 before taxes, $120,210 after taxes.
If interest is paid quarterly, you earn $128,204 before taxes, $120,518 after taxes.
If interest is paid monthly, you earn $128,336 before taxes, $120,588 after taxes.
If interest is paid daily, you earn $128,400 before taxes, $120,622 after taxes.
Example 3: You save $1,000,000 at 9.5 per cent for five years.
If interest is paid yearly, you earn $1,574,239 before taxes, $1,411,093 after taxes.
If interest is paid quarterly, you earn $1,599,110 before taxes, $1,411,093 after taxes.
If interest is paid monthly, you earn $1,605,009 before taxes, $1,426,816 after taxes.
If interest is paid daily, you earn $1,607,915 before taxes, $1,428,272 after taxes.
And although financial experts speak glowingly of the impressive returns that can be had when investing in the stock market (from January to April 2004 the Jamaica Stock Exchange main index surged by 111.51 per cent), the question that is asked over and over again by wary persons 'Can I lose my investment?' cinches the deal. These investors want to ensure that the money they put in is the money that remains in the account. Even though the higher the risk on the investment the higher the expected rate of return earned, it really doesn't matter. Don't tell them about capital appreciation, all they want to know is whether their money is safe.
