How to compute the interest rates

November 27, 2008 at 1:13 am 5 comments


For many years, I didn’t know how banks compute interest rates. Although I have been saving money in the bank for so many years, it is only this year that I learned how to compute my interest rates. Surprisingly, it doesn’t take a rocket scientist to figure it out. The formula is this:

(Amount) x (Interest rates in decimal form) x (holding period) x 0.8
—————————————————–
360 days

Let’s say you have P50,000 in your time deposit account, earning 5% interest and with a holding period of 30 days. Just substitute the values.

(50,000) x (0.05) x (30) x 0.8
——————————-         = P166.67
            360

On the first month, your money will earn P166.67, which will bring your balance to P50,166.67. Just use the new balance if you want to compute your earnings for the second month.

(50,166.67) x (0.05) x (30) x 0.8
——————————— = P167.22
            360

Entry filed under: Banking, money tips, Others, Savings. Tags: , , .

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5 Comments Add your own

  • 1. gladi  |  November 27, 2008 at 12:31 pm

    Thanks for the helpful information!

    Although instead of just memorizing a formula, I think it’s best for us to understand where the formula comes from.

    The interest rate that banks give us is on an annual basis (360days). To be able to compute the money that you’ll earn in a period consisting of x number days, you’d have to divide the amount that you will get in a year by 360 days. In your example:( 50,000 x 0.05 ) / 360. The result is your daily income out of the investment.

    To compute for the amount that your money will earn during the investment period, you just multiply your daily income by your holding period. In your example: 6.94 x 30days. The result is your gross income or in your example, approximately P208.

    Under the Tax Code, interest income is subject to withholding tax of 20%. In other words, the bank retains 20% of your income for remittance to the government. The NET amount that you get to take home is the remaining 80% of your interest income, which in your example is approximately P167 or P208 x .80.

    Best of Luck!

  • 2. pinayandmoney  |  November 27, 2008 at 11:37 pm

    hi, gladi. thanks for dropping by and thanks for explaining further the rationale behind the computation.

  • 3. marj  |  January 27, 2009 at 4:13 am

    i too only learned about this formula last year. but bpi gave me 365days instead of 360. which is more appropriate?

  • 4. pinayandmoney  |  January 27, 2009 at 5:24 am

    hi, marj. that’s weird. i always encounter 360 days but not 365 days. if we compute it, mas maliit ang earnings kung 365 days.

  • 5. arthur  |  October 24, 2011 at 6:26 am

    which is better? 30days? 90days?
    which one gets bigger return?

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