Savings Calculator
There are few things more important to your long term financial wellbeing than saving well. Using the Savings Calculator can help you understand what you need to do to reach your financial goals. By using the calculator you will be able to project the growth and value of whatever you save and will be able to determine whether you are on track to hit your targets and achieve your lifestyle goals.
As is the case with most savings accounts, the Savings Calculator uses a compound interest formula. By inputting different compounding periods – daily, monthly, quarterly, annually etc. – you will see the difference compounding makes. Check out our Compound Interest Calculator to see the effect of compounding in more detail.
Look out for savings deals that compound regularly, ideally as often as possible, as compounding means you are always earning interest on the interest accrued too, and not just on your initial investment.
Effective Interest Rates and Nominal Interest Rates
Compounding your savings is important as this means that what is called the Effective Annual Rate (EIR) will be even higher than the headline Nominal Rate.
The Savings Calculator enables you to see this effect. To use it to best effect, follow these steps.
| Step | Instruction |
|---|---|
| 1 | Enter your balance or a potential balance |
| 2 | Enter a rate (Play around with different rates to see the difference one product makes over another.) |
| 3 | Enter various compounding periods – daily, monthly, quarterly, annually etc. – and see the difference the frequency of compounding makes |
The calculator will show you how much interest you will earn annually or monthly etc.
To illustrate the enormous difference the frequency of compounding can make see the following example.
| Term | Value |
|---|---|
| Initial investment | $3000 |
| Interest Rate | 5% |
| Term Length of Policy | 2 years |
Balance after annual compounding = $3314 = $314 in interest = EIR 5.116%
Balance after monthly compounding = $9675 = $6675 in interest = EIR 79.586%
Savings Advice
It is difficult to give advice that works for everyone, as each of us is in a different situation in life. But the calculator can certainly help you know the kind of risk you are willing to take in order to generate returns at a particular level.
Some savers prefer very safe policies with usually low interest rates but assured capital returns. Others prefer riskier options with the possibility of a higher return, but which also carry a potential risk to some capital. In addition, be aware that in some policies you will pay tax on your savings, including on any interest you earn. That can dent your returns, and in each case that tax rate is dependent on your country’s tax rates and also on your wider personal financial situation and overall level of income or wealth.
Some policies enable you to have tax free gains, though, so check out the best way in your own country to acquire that kind of savings policy, as for most people it is good financial advice to maximize tax free allowances.
Tax Free Savings: In the UK, for example, you can use an Individual Savings Account (ISA) to save up to £20,000 per annum and all the gains made on those investments are tax free.
Always remember that there are financial professionals who can give you long term advice. It is often worth talking to someone if you want to have long term strategies that are diversified, secure, but also likely to generate decent returns.
Retiring Financially Secure
For most people that is the dream – to know that when you are older your quality of life is safe and secure. It is not always easy, however, to sustain your quality of life after you stop working.
At the same time, most people do not want to carry on working when they are old. If you are interested, look into the concept of Financial Independence Retiring Early. This is a mindset worth exploring, as there is a wide movement out there of people who want to do just that.
In the meantime, using the Savings Calculator will enable you to see the incredible power of saving regularly and with good compounding products.
