Thursday, April 29, 2010

Idle money earning more!

Idle money never has worked better for you. Your deposits lying in your Savings Bank Account will work better for you today than they did yesterday. Effective Apr. 1, 2010. the RBI has issued an announcement by changing the terms of interest calculation for Savings Bank account deposits. The new method is a substantial departure from the old practice, whereby interest is calculated on the minimum balances held in these accounts from the 10th of each month to the last day of the same month.

In the older method, interest was calculated at 3.5%p.a on the minimum balance between the 10th and the last day of the month. However, effective April 1st this model has changed to interest payable on the `balance on a daily basis`.

This method of calculation is a paradigm shift from the conventional method of calculation that awarded the bank account holders with meager interest earnings.

The change in interest payable is as illustrated below:

New Interest Rate Computation
Date
Transaction
Amount
Balance
Old System
New System
Amount
Interest
Amount
Days
Interest
1st June
Opening Balance
12000



12000
1
1.15
2nd June
Deposit
25000
37000


37000
1
3.55
3rd June
Withdrawal
5000
32000


32000
5
15.35
8th June
Withdrawal
6000
26000


26000
2
4.98
10th June
Withdrawal
12000
14000


14000
3
4.02
13th June
Deposit
3000
17000


17000
5
8.15
18th June
Withdrawal
2500
14500


14500
8
11.12
26th June

4500
10000


10000
5
4.8
30th June
 TOTAL interest

10000
10000
29.17
 TOTAL
 30
53.12

If one were to go by the older method of interest calculated at 3.5% p.a on the minimum balance between the 10th and the last day of the month. The interest workings were calculated on the Rs 10,000 balance that was the minimum between the 10th and the 30th of the month.

However in the new system of calculation, interest is calculated on a daily basis thereby giving the depositor almost twice the amount of interest. With the interest amounts almost doubling it will provide a better cushion for the conservative investor who prefers the virtually risk free bank deposits to any other investments.

However in a rising interest regime; this move is more than what one could ask for- liquidity and higher interest. But don`t make this a reason to be lazy- Invest your money according to your goals and your time horizon. Keep 2-6 months expenses as emergency funds in a combination of Bank accounts and liquid funds. Don`t let that money be idle, even though it is better than yesterday.

The author is a managing director and chief financial planner at International Money Matters.

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