January 29, 2025 l Business Mirror
Do you know how to calculate the interest you are supposed to be getting from your bank time de-posit placement? It would seem that a number of depositors do not know how to do this and just accept the calculations given to them by their bank. While I believe that the bank will not make a mistake in the interest amount calculation, it certainly will not hurt you to know how to make the calculation yourself.
The simplest formula “I = Prt,” where “I” is the Interest amount earned for the period, “P” the original Principal amount of your placement, “r” is the annual interest rate and “t” is the tenor or period, which is placement days/360. Note that while there are 365 days in a year, the banking convention in calculating interest uses 360 as the denominator for tenors of less than one year.
Just as an example, you have a principal amount of one million pesos that you would like to put in a time deposit for 60 days and the bank quotes you a gross placement interest rate of 5 percent, how much interest would you earn in that 60 day period?
Using our above formula: “I = 1,000,000(.05)(60/360) = 8,333.33.” This means that after the 60 day period, you will get an interest payment of 8,333.33 pesos. However, since there is a tax imposed by the Philippine government on your time deposit of 20 percent, this means that 1,666.67 pesos will be withheld by the bank and remitted directly to the government, leaving you with 80 percent of the gross interest amount of 6,666.66; plus, of course, your principal amount of one million pesos.
This brings us to the next fundamental concept of compounding.
This means that should you decide to roll over your time deposit for both the principal amount and the interest earned under the same terms, the interest amount you will get will now be more because your principal amount has grown to P1,006,666.66. Therefore, after another 60 days, the interest amount you will get will be “1,006,666.00(.05)(60/360)(.80) = 6,711.11.”
While the interest amount difference of 44.45 pesos between the first time deposit versus the sec-ond one my not seem large, doing this renewal over several periods has a compounding effect of growing more each cycle. This is what is meant by letting your money work for you. Under the right conditions you could literally live on interest for the rest of your life. We can talk more about that in one of my future columns.
I hope this article has helped expand your financial literacy. Happy Chinese New Year to you all!
***The views expressed herein are his own and do not necessarily reflect the opinion of his office as well as FINEX. For comments, email georgechuaph@yahoo.com or gschua@up.edu.ph. Photo is from Pinterest.