Average Daily Balance, And Why Your Savings Account Paid Even Less Than Your Already Low Expectation

Average Daily Balance, And Why Your Savings Account Paid Even Less Than Your Already Low Expectation
My second job was at a bank, and that's when I really started saving. During my first year at that job, I was able to save 12,000 in my first year. That amount was higher than my monthly gross pay, so I was pretty happy I was able to save that much.

At the end of the year though, my interest was around 12 pesos (and I think that was before the tax kicked in - and, to boot, those were in the "old days" before the BSP started emulating the US Federal reserve in cutting down interest rates to all-time lows.)

Obviously I was bummed.

When I first opened a savings account, like most rational people, I looked for one with the highest interest. Back in those days, it was possible to open a savings account with 1-2% interest. (In contrast to circa 2012-2014, those rates would be available only to time deposits)

But if you've ever opened a savings account, you've probably felt like the interest it earned was less than what you were expecting based on the quoted rate (1%) - even before factoring in the capital gains tax!

This is because the quoted interest is annualized. That means if your money was in the account for an entire year, that would be the interest you get. But that's rarely the case for various reasons.

In fact, ordinary savings accounts usually get credited with the interest every 3 months. That means you get just 3/12 (or 25%) of the quoted 1% interest rate for that "payout".

To make it more interesting (or just plain worse, depending on your viewpoint), the interest paid to you is computed using the Average Daily Balance.

If you had exactly 10,000 in that savings account for the entire 3 months, then you would get 25% of 1% of 10000; or 25 pesos. (And that's still subject to tax!)

If at anytime you had less than 10k, that "payout" gets lower; though it can also get higher for each day you had more than 10k.




Available Balance
Days available
Total Contributed Balance
Jan 1 - 31
3000
31
93000
Feb 1 - 28
6500
28
182000
Mar 1 - 31
10000
31
310000



585000




Days in the Quarter
Average Daily Balance
(Total Contributed Balance/Days in the Quarter)
"Payout"
(Average Daily Balance * (0.01 * 0.25)
90
6500
16.25


16.25! Wow - not!

Obviously, if you want to "earn more" from a savings account, you would need to deposit as much money into it as possible and leave it there for as long as possible.

However, in my opinion, that's not the "correct" use of a savings account. Instead, it's better to opt for convenience; like online access and numerous easily accessible ATMs.

If you really want to earn more, then instead try Time Deposits or Mutual Funds and UITFs.


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photo credit: Mukumbura via photopin cc

4 comments:

  1. To keep your money in the bank as a savings deposit may not be the wise thing to do. Not only is the interest too low, the current inflation rate is also too high. This means that while the money sits in the bank, it is actually loosing value. Set up an emergency fund to cover contingencies and invest the rest. Depending on you risk appetite, investment instruments and platforms can yield somewhere from 4% to as high as 20% (may be even more). Money that sits in the bank is already condemned to lose value. Taking a risk on an investment is actually a better alternative. Think about it.

    ReplyDelete
    Replies
    1. That's an oft-repeated advice. However people seem to underestimate liquidity.

      As you said, you should set aside an emergency fund.

      And your emergency can't all be in Time deposits and UITFs/Mutual Funds. Emergencies hardly if ever happen at convenient times. Your money needs to ready whenever, but still relatively safe - and that usually means a savings account.

      At the same time, investing just to get great returns is pointless. You need to invest for a goal. And once that target return is met, you move the money to a safer place - which is again usually a savings account.

      Anyway, this was meant to explain what is, at first, usually a head-scratcher, not get people to "invest" in savings accounts.

      Delete
  2. Hi! If kunwari nawithdraw ko lahat ng pera q sa account q automatic close na ba yon? Passbook po sya, ITF, Eastwest bank.

    ReplyDelete
    Replies
    1. Nope, open pa dn. Zero lang ang balance. unless dagdagan mo, magkakapenalty. And eventually pag walang activity talaga, mag coclose na.

      Delete