Explain how the same stated rate gives a different effective yearly return depending on how often interest is credited.
Pull up the fact sheet or the terms and conditions for one of your savings accounts. Look for the wording on when interest is paid into the account. You might see yearly, monthly, or "calculated daily and credited monthly". Note it down beside the rate. The yearly rate in large type tells you nothing about this schedule, but the schedule affects how much that rate earns you.
How often a bank adds interest to your balance is its crediting frequency. A few accounts add interest once a year. Monthly is common for savings accounts. Others work out the interest every day and pay it in once a month. Each time interest is added, it becomes part of the balance and earns interest of its own. Lesson 2.1, "Simple interest pays on what you put in, compound pays on what you earned", showed you this compounding at work.
Monthly crediting does not mean you get the whole yearly rate twelve times. The bank splits the yearly rate into 12 equal parts and pays one part each month. Last month's interest has already joined the balance, so the bank works from a slightly higher amount each time, and each payment is a little bigger than the one before.
Imagine two banks that both quote 3% a year for a twelve-month deposit, and you place S$10,000 with each (an invented example).
Bank 1 pays interest once, at year end: S$300, or 3% of S$10,000. You finish with S$10,300.
Bank 2 pays every month at 3% / 12 = 0.25% per month. In month 1 you earn S$25 on S$10,000. In month 2 the bank works out 0.25% of S$10,025, which is about S$25.06. By the end of twelve months you hold S$10,304.16 (S$10,000 x 1.0025^12).
Bank 2 leaves you about S$4 ahead. Neither bank has miscalculated, and neither has charged a hidden fee. The only thing separating the two results is crediting frequency.
To compare accounts on equal terms, convert each one to its effective annual rate. This is what you really earn in a year, or really pay, once you count the compounding that happens inside the year. The formula is (1 + stated rate / n) to the power of n, minus 1, where n is how many times a year interest is credited. Use 1 for yearly, 12 for monthly and 365 for daily.
Do the working in this order. Start with the stated yearly rate and look up n. Divide the rate by n and add 1. Raise that figure to the power of n, then subtract 1. What is left is the effective annual rate.
For 3% credited monthly, you get 1.0025^12 - 1, roughly 3.04% effective. On S$10,000, the gap between 3% and 3.04% is the S$4 a year that Bank 2 paid over Bank 1. For 3% calculated daily across 365 periods, the result is about 3.05% effective. For 3% credited yearly, the effective rate is exactly 3%, since no interest is added partway through the year to compound.
Once every account is stated as an effective annual rate, you can set them side by side and compare them directly, however each one schedules its crediting.
At savings rates around this level, how often interest is credited makes very little difference. A higher stated rate paid yearly will usually beat a lower stated rate paid monthly. When you choose where to keep your savings, frequency is rarely the deciding factor.
The higher the rate, the wider the gap between the stated and effective figures. Take 24% a year (an invented figure). Credited yearly, it stays at 24% effective. Charged monthly, it is 2% a month, and 1.02^12 - 1 gives about 26.82% effective. Worked out daily, it is about 27.11%.
Lenders usually charge high-rate debt daily or monthly, so the yearly rate they quote understates what a borrower ends up paying. Suppose a borrower leaves S$5,000 unpaid for a year at 24% (an invented example). Monthly compounding brings the cost to about S$1,341, compared with the S$1,200 someone would expect from the headline rate. On savings, compounding within the year adds a few dollars. On credit cards and loans it costs real money. Module 3 goes further into how loans are priced, and the course "Credit and debt: scores, cards, loans and BNPL" covers card debt in detail.
In Singapore, banks set out crediting details in the terms and conditions or in the product's fact sheet. For every account on your shortlist, find:
the stated yearly rate how often interest is credited whether interest is worked out on the daily balance or on a monthly figure
Work out the effective annual rate for each account and compare those figures. If an account gives only the rate, ask the bank how often interest is credited before you commit.
You now have a formula that turns any stated rate and any crediting frequency into a single yearly figure. Pick two accounts that quote the same rate but credit at different intervals, and work through the formula for each one.
Take two accounts with the same stated rate, one crediting monthly and one yearly, and calculate the effective annual rate of each.
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