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Understanding interest

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Why interest matters

When you put money into a savings account, your bank or financial institution will reward for keeping your money with them. They'll pay you a small percentage for the privilege of using your money when you don't need it. This is called interest.

Interest helps to make your savings grow. The higher the interest rate you get on your savings, the faster those savings will grow. Whenever possible, look for accounts that offer interest rates that are higher than the rate of inflation (that's the rate at which the prices of goods and services increase). Otherwise, the real value of your savings may decrease. And remember that you may have to pay tax on the interest you earn.

Choosing the right savings option often requires a balancing act between the interest rate offered, and the terms and features it comes with. For example, savings accounts offering higher interest rates may require you to:

  • Keep your savings in place for a defined period
  • Give notice to access your savings
  • Invest a minimum (or maximum) sum each year or specified period

By contrast, a flexible savings account, offering instant access, is likely to offer a lower interest rate.

Where you choose to deposit your savings will depend on what you're saving for. If you're building an emergency savings fund, for example, you'll probably want immediate access to your money, and so an account offering instant access would be important. However, if you're saving towards a deposit for a house, an account offering higher interest, but which requires giving notice to access your savings, may be a better option.

Compound interest

Compound interest is interest earned on previously earned interest. The longer you save, the more the interest you earn compounds. Compound interest quickly mounts up, and can significantly increase your savings over time.

The earlier you start saving, the more time you have to earn compound interest. It’s a good idea to make regular deposits, if you can, to keep your money growing. It’s also best to avoid taking money out of your savings account as that reduces the amount of interest you’re earning.

Ready to start saving?

Check out some of our savings accounts and see if there's one that's right for you.

And if you need more inspiration, we've got even more tips on how to build up your savings.

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