The savings or fixed deposit account interest payment system is a very familiar one, such that account holders expect to receive their interest payment at the end of every month. In Nigeria, few rules are attached to operating a savings account if you don’t want to forfeit your interest – check them here. Okay, people expect their interest but do not know exactly how much to expect in payment, the VAT removals, and all that calculation. To be fair, it can be boring to calculate. However, this article will give us all simple ways to calculate all the types of interest in the banking system.
GETTING INTERESTING? READ: How To: Open a Corporate Bank Account in Nigeria; Checklist of Documents Required
What’s a Saving Account?
A savings account is a bank account created for the sole purpose of keeping money away in the bank. People operate savings accounts for different reasons. For example to protect from theft, earn stipends on the money, prevent unnecessary spending, etc.
What is a Fixed Deposit/FD Account?
A fixed deposit or FD account is a safe investment account that is created at backend by the bank/financial institution on the customer’s instruction, based on a stated interest rate and tenor (time) negotiation. A one-off deposit is done on this type of account. For example, when you instruct your bank to ‘fix’ N100,000 for you at a 5% rate for 6 months.
There are two popular ways to calculate interest on savings or fixed deposit account in the bank – simple and compound interest rates.
How to Calculate Simple Interest
The simple interest rate, as it implies, is a simple interest rate that puts the amount being invested or saved, the time it’s saved for, and the interest rate given into consideration.
Formula 1: To calculate your interest rate on savings accounts where you get your interest paid to you monthly (30 days), the formula is P x r/100 x 30/365 (Where P = Principal, R = Rate).
Formula 2: PRT – Principal x Rate (R/100) x Time (in years)
For example, if you invest N10,000 at 5% per annum for 3 years, you will need to calculate the simple interest rate like this:
Step 1: N10,000 x (5/100) x 3
Step 2: N10,000 x 0.05 x 3 = N1500.
This means that the interest you get on N10,000 at 5% for 3 years is N1,500.
So, if you add this interest to your principal, you get N11,500.
GETTING INTERESTING? READ: What is Private Banking? See the Best Private Banks in Nigeria
How to Calculate Compound Interest
It depends on the negotiations with the bank. If you negotiated compound interest, it simply means that interest accrued is added to your principal so that you earn interest on the interest already earned also. This is also a good way to calculate interest savings or fixed accounts.
If the bank offers you 5% for keeping N10,000 with them for 3 years under a compound interest method, this is how you calculate it below:
First year will be a simple interest calculation (because there is no interest to compound on ground).
N10,000 x 5 x 1/100 = N500.
So the interest you earn on your investment in the first year is N500.
This earned amount is then added to your next years’s principal which makes it N10,500. Our next year’s calculation will be based on N10,500 principal. Get it?
N10,500 x 5 x 1/100 = N525.
Add your interest to your principal again, you get N11,025.
N11,025 x 5 x 1/100 = N551.25k.
Simply add the current interest to your current principal, you get N11,576.25.
To show ‘workings’, the formula to calculate Compound interest is (CI) = P (1 + i / n) ^ nt.
P is your initial amount = N10,000
i is rate = 5/100 = 0,05 rate per year
n is 12 months = 1 year
T is Time = 3 years
(CI) = N10,000 ( 1 + 0.05/1) (1)(3)
(CI) = N10,000 ( 1 + 0.05) (3)
(CI) = N11,576.25.
Therefore, overall, your principal plus interest over the 3-year period is N11,576.25.
By now, you should be able to calculate your own interest rates yourself. Remember that Nigerian banks deduct 7.5% Withholding Tax (WHT) from whatever interest you’re paid at the end of the month so put that into consideration when you’re making your calculations. This means, from whatever you get, multiply it by 0.075.