What are bank interest rates and why should you care?

The term ‘bank interest rates’ gets thrown around a lot.

X bank is bragging about having a high interest rate. Y bank says you won’t get a higher interest rate anywhere else. 💁‍♀️ Why is this interest rate so important? And why are banks competing so much over them?

We’ve got just the blog post to answer your questions.👇

What exactly are these ‘bank interest rates’?

An interest rate is a portion of your money that the bank is promising to give you every year, as a nice thank you for choosing them as your bank.

Put simply, a 2% interest rate means that the bank will give you 2% of the total amount in your balance every year. So if your bank account holds RM10,000, your bank is promising to give you RM200 every year. Yes, free money. Yay! 💸

The reason banks are offering this free money is simple - to keep you as a customer. The higher the interest rate, the more free money you get. Obviously you should pick a bank offering the highest interest rate.

Usually, banks in Malaysia will offer to hold your money with two products: a Savings Account or a Fixed Deposit (FD) Account.

Fixed Deposits vs Savings

A savings account is exactly what it says it is - another account to save your money in. Just like a normal current account, you get a debit card and you can withdraw your money at any time. The interest rate you’re earning will be deposited from the bank into your account every month. Interest rates range from 0.05% to 4.38% per year.

An FD is another account to put your money in. The difference is that this one offers higher interest rates. But you won't have the freedom to withdraw your money at any time.

Depending on the FD you invest in, this can range from 6 months to 5 years, with interest rates starting from 2.75% per year. This kind of account is a popular choice for people who are saving for a house deposit, retirement or a big purchase. 🏡

With an FD, the investment term and interest rate are fixed. This makes it easy to calculate the return you’re expecting. It also means the initial deposit will be higher, starting with at least RM1,000. When deciding whether to open a savings account or FD, it’s good to take into account the short and long-term benefits.

Let’s take the example of Jenny, a 30-year-old mother of two who works in sales for a cool startup. 👧

Jenny has been saving up and has RM50,000 to invest. After doing a bit of research, she figures out she can either get: 1. A 4% interest on a 12 month FD 2. A 2% interest on a normal savings account.

After thinking a little, she decides she wants to keep RM10,000 in a savings account in case of emergencies. And she’ll put the rest in an FD to start saving for a house deposit and buy that nice house she’s been eyeing. 🏡

If we quickly do the calculations, we can see that: 1. Her FD rates will give her an extra RM1,600 at the end of the year 2. Her emergency fund will have an extra RM200

If Jenny had kept all her money in the savings account, she would only have gotten RM1,000 at the end of the year and not the RM1,800 she now has. That's thanks to her clever research. 😎

As we can see from Jenny’s example, a FD and savings mixed approach can work very well. So why not start by building your emergency fund in a savings account now?

Why should I care about bank interest rates?

The short answer: inflation.

You want the long answer? Ok, here we go.

Inflation is basically the rate at which prices get higher every year. We won't go into too many details, but if in 2019, RM15 gets you a coffee and a bagel, in 2030 it’ll probably only get you a coffee. In that same sense, your income should also increase from year-to-year.

Inflation comes from the fluctuations in the market and varies every month. In July 2019, inflation was at 1.5%. For the entire year of 2018, the inflation rate was, on average, 0.19%.

In 2017, inflation in Malaysia rose to a pretty high 3.7%, meaning your coffee would have gone from RM10 to an exorbitant... RM10.37. 😂

Okay fine, not much of a dealbreaker. But what about with larger amounts? Remember what we said about your income increasing? Well, what about your savings? Who’s making sure they increase every year too? Ermmmm... you!

If you put all your money into a current account that doesn’t earn any interest, that’s on you. In 2017, RM10,000 would still have been RM10,000. But at the end of the year the real value would have been RM9,630. And so on, every year.

That’s why a healthy bank interest rate is important - at least to keep up with inflation and not lose money every year.

To finish up…

Bank interest rates are our friends. They put your money to work and make sure you get a nice little surprise at the end of the month. We also like them because they help us beat sneaky old inflation.

Whether you’re thinking of keeping your money in an FD or regular savings account is totally up to you. You can decide to mix it up like Jenny, or create your own interest rate combo. Just make sure you don’t end up putting short-term money in a long-term FD!