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How interest works and is calculated on savings accounts

Man calculating interest on his savings


Aside from searching for high-interest savings to grow your money, understanding how interest is calculated on your savings and investment instruments is crucial for making informed decisions about which savings products to choose and how to maximize your earning potential. There are two main methods of interest calculation: The Annual Percentage Yield (APY) and the monthly interest rate.

APY is the percentage of interest you earn on your principal each year and is typically expressed as “per annum” or “p.a” behind the proposed interest rates, such as 12% p.a. It’s important to be aware of the actual interest rate on any investment being offered to you.

Now, let’s dive into the two types of interest: simple interest and compound interest.

Simple Interest Calculation:

Simple interest is calculated only on your savings or investment principal. For example, if you invest ₦‎100,000 at 10% interest p.a., your simple interest would be ₦‎10,000 only.

Compound Interest calculation:

Compound interest, on the other hand, is the interest that is earned when you reinvest your principal and interest again for a set period of time. For instance, if you were to reinvest the ₦‎100,000 principal plus your ₦‎10,000 interest for another year, you’d get ₦‎111,000. Someone who only invested the ₦‎100,000 principal, on the other hand, would make ₦‎110,000. It may seem like a small difference, but over time, compound interest can yield significant returns.

In fact, compound interest is often referred to as the “eighth wonder of the World” because it can provide more returns to investors who are patient and willing to let their investments grow over time. For example, after 10 years, using the compounding method, your investment could grow to N259,000, which is N59,000 more than what regular reinvestment would provide. 

Better understanding – more informed decisions

In summary, understanding the different methods of interest calculation can help you make informed decisions about where to invest your money. While simple interest may seem straightforward, it’s important to consider the benefits of compound interest, which can yield significant returns over time. 

At Renmoney, we offer two savings products that utilize compound interest: RenFlex, which offers up to 10% per annum with no interest penalties on withdrawals, and Fixed Savings, which offers up to 18% on deposits. 

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