Average Daily Balance, And Why Your Savings Account Paid Even Less Than Your Already Low Expectation

My second job was at a bank, and that's when I really started saving. During my first year at that job, I was able to save 12,000 in my first year. That amount was higher than my monthly gross pay, so I was pretty happy I was able to save that much.

At the end of the year though, my interest was around 12 pesos (and I think that was before the tax kicked in - and, to boot, those were in the "old days" before the BSP started emulating the US Federal reserve in cutting down interest rates to all-time lows.)

Obviously I was bummed.

When I first opened a savings account, like most rational people, I looked for one with the highest interest. Back in those days, it was possible to open a savings account with 1-2% interest. (In contrast to circa 2012-2014, those rates would be available only to time deposits)

But if you've ever opened a savings account, you've probably felt like the interest it earned was less than what you were expecting based on the quoted rate (1%) - even before factoring in the capital gains tax!

This is because the quoted interest is annualized. That means if your money was in the account for an entire year, that would be the interest you get. But that's rarely the case for various reasons.

In fact, ordinary savings accounts usually get credited with the interest every 3 months. That means you get just 3/12 (or 25%) of the quoted 1% interest rate for that "payout".

To make it more interesting (or just plain worse, depending on your viewpoint), the interest paid to you is computed using the Average Daily Balance.

If you had exactly 10,000 in that savings account for the entire 3 months, then you would get 25% of 1% of 10000; or 25 pesos. (And that's still subject to tax!)

If at anytime you had less than 10k, that "payout" gets lower; though it can also get higher for each day you had more than 10k.

	Available Balance	Days available	Total Contributed Balance
Jan 1 - 31	3000	31	93000
Feb 1 - 28	6500	28	182000
Mar 1 - 31	10000	31	310000
			585000

Days in the Quarter	Average Daily Balance (Total Contributed Balance/Days in the Quarter)	"Payout" (Average Daily Balance * (0.01 * 0.25)
90	6500	16.25

16.25! Wow - not!

Obviously, if you want to "earn more" from a savings account, you would need to deposit as much money into it as possible and leave it there for as long as possible.

However, in my opinion, that's not the "correct" use of a savings account. Instead, it's better to opt for convenience; like online access and numerous easily accessible ATMs.

If you really want to earn more, then instead try Time Deposits or Mutual Funds and UITFs.


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