How to use monthly compound interest to reach your financial goals?

Imagine your savings growing on an accelerated monthly basis without having to reinvest or add more money! The power of compound interest on your Savings Account can help you achieve this and much more. 

From meeting your financial goals to earning a higher than average interest on Savings Account, there is a world of possibilities waiting for you to explore.

But what are financial goals? 

They are your and your family’s short-term and long-term financial needs. They might include –

· Buying the latest mobile phone

· Upgrading your home

· Buying a new home

· Childrens higher education

· Marriage

· Travel, etc.

Different families have different goals, but the bottom line is the same – saving. While you can identify and set your financial goals, meeting them would be impossible without savings.

That is why individuals work hard day in and day out so that they can meet their basic expenses and save up for their goals.

When it comes to savings, there are various investment avenues that you can explore. Most of these avenues generate compounding returns which help the corpus grow.

Let’s understand what compound interest is all about.

Also read - How to set financial goals you can really achieve? 

Compound interest – the concept
 

Compound interest is the sum of interest on savings calculated on principal amount (initial) and the accumulated interest from previous periods. Under this model, the interest accumulates after each calculation and subsequent calculation is done on the accumulated interest as well as the principal. In short, you earn interest on interest.

Confused? Here’s a simple example to understand –
 

Say you invest Rs 10,000, on which you earn a compound interest of 5% per annum. After the first year, your investment would fetch an interest of Rs 500. In the second year, Rs 500 would be added to Rs 10,000 to calculate the interest for that year. So, in the second year, you will earn 5% on Rs 10,500, which comes to Rs 525.

In the third year, Rs 525 would be added to Rs 10,500 to calculate returns, and the process would continue. This is how compounding of returns works.

How to calculate compound interest?
 

There’s a simple formula for calculating compound interest. It is as follows –

M = P {(1 + R/T) ^ N * T}

In the formula, the values are expressed as follows –

M = maturity amount

P = invested amount or principal

R = rate of interest

T = compounding frequency

N = investment tenure

So, if you deposit Rs 50,000 for 5 years at an interest rate of 6% per annum, compounded annually, the maturity value would be calculated as follows –

M = Rs 50,000 {(1 + 0.06/1) ^ 5 * 1}

= Rs 66,911

Compound interest = Rs 66,911 – Rs 50,000 = Rs 16,911

Monthly compound interest – an added advantage
 

While compounding gives increasing returns every year, compounding frequency plays an important aspect in growth. The higher the compounding frequency, the higher would be the returns that you get.

Here’s an example to understand –

Increased compounding frequency = increased returns = increased corpus

Unlocking monthly compound interest 
 

While monthly compounding can yield a higher corpus, how do you get it? The answer is simple – through an investment avenue that allows monthly compounding.

IDFC FIRST Bank Savings Account gives you just that. A rewarding savings account, IDFC FIRST Bank Savings Account allows interest up to 7% per annum with the benefit of monthly interest credit to help you grow your Savings Account balance for your financial goals.

How to maximise monthly compound interest with a Savings Account?
 

There are ways in which you can maximise the compound returns you earn on your Savings Account. These are as follows –

· Compare and choose
 

Different financial institutions offer different interest rates on Savings Accounts. Compare the interest rates across different Savings Accounts and choose one whose interest rates are the highest. Higher interest rates convert to higher returns, and you would be able to get more through monthly compounding.

For instance, IDFC FIRST Bank Savings Account offers interest up to 7% p.a., one of the highest in the industry.

· Capitalise on promotional offers
 

Financial institutions launch various offers on their Savings Accounts that give you extra on your savings. Use these offers for more returns.

· Avoid unnecessary fees
 

Savings accounts require a minimum average balance, monthly or quarterly. Failure to maintain the minimum balance invites a fee. Avoid this fee by ensuring that you maintain a minimum savings account balance.

· Save regularly 
 

You can supplement the balance in your savings account by saving regularly. Regular savings help you earn more as the balance on which the interest is calculated increases.

· Reinvest your earnings
 

While monthly compounding gives you additional interest income every month, do not withdraw the income. Instead, reinvest the additional interest so that your savings account balance grows. Reinvestment would allow for further compounding of returns and build up your corpus considerably.

Reaching financial goals with monthly interest credits
 

Monthly compounding is a blessing as it adds to your corpus and helps you achieve your financial goals easily. You can also give a boost to your savings through the following tips –

· Have a long-term investment horizon. Compounding works wonders if you give your investment time to grow

· Cut down on unnecessary expenses to increase your savings. Higher savings equal higher returns

· If you have existing loans, make a provision for repaying them without fail to avoid unnecessary interest outgo

· Check the tax implication of the savings account interest

Also read - All you need to know under 3 minutes about IDFC FIRST Bank Saving Account

The bottom line
 

Discover the benefit of monthly compound interest and understand how it can help you plan for your goals. Make a financial plan listing down your goals, their time horizon and the estimated corpus required for them. Save for your goals in a high-interest savings account which offers a monthly compounding feature, like IDFC FIRST Bank Savings Account. Get monthly interest credits and build up your corpus one credit at a time. 

Disclaimer

The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.