Best Savings Rates
Advice, help, information and guidance on savings, interest rates, and savings tax advice.

Best Savings Account Rates - Simple Interest

best savings rates by AnnaIn order to find the best savings account rates we need to understand how interest is calculated, so let's start with the simplest of all, which not surprisingly is called simple interest!!

Now let me ask you a question - do you avoid gambling in a casino, or dare I say investing on the stock market because you are frightened of losing money fast - well you may be surprised to hear that you're just as likely to lose money every day because of your savings decisions. Many people collect only 2% to 3% on their savings accounts, and yet quite happily pay out 18% to 20% on credit card balances.  The principles of simple and compound interest are the same whether you're calculating your earnings from a savings account or the fees you've accumulated on a credit card. Paying a little attention to these principles could mean big payoffs over time.

Savings Interest Rates - The Maths of  Interest

If you are one of those people who is terrified of maths - don't worry - I don't propose to give you a maths lesson ( well not much anyway), but in order to become better off, dare I say wealthy, then we need to get maths working for us and not against us. There are several issues that we need to consider when looking at the best savings rates and how we can increase our savings long term, rather than watch them erode over time, and the first of these is inflation.

Inflation is measured in many ways, and in the UK, the most common measures used by the Government are the CPI and RPI ( consumer price index and retail price index). However you measure it, inflation has a corrosive effect on your savings. At 4.5%, inflation will cut the buying power of £100,000 to £63,100 in ten years - a significant amount. If you are a high rate taxpayer the situation is even worse - just to stand still you will need to find an account paying 7.6% interest before tax! If inflation is 5%, and your savings are only earning 4%, then your savings are falling in value in real terms.

The next issue is that of your debts ( sorry but they are important). The interest charged on debts is much higher than the interest earned on savings so if you have some spare cash, before you start saving or looking for the best savings accounts rates, pay off your debts first!

Savings Account Rates - Simple Interest Example

Let's look at a simple example which I hope will explain things clearly for you. In calculating our simple interest we have three variables ( items we can change to calculate different results ) as follows :

P = Principal - this is the amount of money you are investing ( often called capital as well)

r = the interest rate being offered on the account

t = time which is  normally measured in years

In order to calculate our simple interest we use the following formula :

Interest received (I) = P  x r  x t

So let's put some figures in to the above and calculate the interest we would receive if we invested £1,000 in a savings account with a 5% interest rate and over 24 months ( 2 years) . So from the above P = £1,000, r = 5/100 ( remember we have to convert our percentage to a fraction) and t = 1 ( 1 year) we would receive the following :

Interest received = 1,000 x 5/100 x 1

Interest received = £50

Now if we take our £50 out and then re-invest our £1000 again then we will simply earn another £50 in year two. If you carried on doing this for ten years, at the end of the decade you would have £500 in savings and your original £1,000 - hardly sets the pulses racing, and is certainly not going to make you wealthy. So what's the answer - compound interest. Never underestimate the power of compound interest it will work in your favour when combined with the best savings account rates, so let me explain how it works!

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