Which savings account will earn you the least money?

Which savings account will earn you the least money?

a.One that compounds interest daily.

b.One that earns simple interest daily.

c.One that compounds interest monthly.

d.One that earns simple interest monthly.

Answer: d.One that earns simple interest monthly.

The savings account through which you will make the least amount of money is the savings account that attracts simple interest monthly. To be more specific, this option is characterized by the slowest growth of your savings among all the options offered here. Here, the interest earned is counted on the principal amount only without adding other charges like incremental interests. When it is combined with calculating the interest monthly, it leads to the lowest total return on your savings.

To exemplify this let us discuss an example. Let us assume that you are saving in a bank and you have got $10000, which is earning an interest rate of 5% per annum. After one year:

With simple interest calculated monthly: You would be paid $500 which is 10,000 * 0.05.

With simple interest calculated daily: Again, you would still get $500, but it would be a little sooner.

With compound interest calculated monthly: It means, without taxes, you would get about $512. 67.

With compound interest calculated daily: You would make approximately $513. 22.

The degree of divergence tends to be even more accentuated in longer terms or when the principal amount is massive. Daily or monthly compounding lets you earn interest on the interest, resulting in the fund growing at a faster rate. Daily compounding gives an even slightly better result than monthly compounding. On the other hand, simple interest increases its rate incrementally and thus does not take advantage of compounding. Comparing the two options of daily and monthly simple interest, the monthly option of computation entails less frequency of interest charges and is therefore the offer least beneficial among all the possibilities mentioned above.