Understanding interest rates can put more money in your pocket

If one of your SMART financial goals for the year is to save more money and pay less interest on debt, this guide to understanding interest rates was written for you.

What are interest rates?

An interest rate is a percentage charged or paid on the total amount you borrow or save.

• If you're borrowing money, the interest rate is the cost associated with borrowing money - so it increases the total amount that you owe.
• If you save or invest your money in an account that offers you interest on your savings, the interest rate is the amount that your savings will earn over the investment period - so it increases the total savings balance.

Even a small change in interest rates can have a big impact on how much you owe or earn.

• If you're borrowing money, the interest rate is the cost associated with borrowing money. So, it increases the total amount that you owe .
• If you save or invest your money in an account that offers you interest on your savings, the interest rate is the amount that your savings will earn over the investment period. It increases the total savings balance.

Even a small change in interest rates can have a big impact on how much you owe or earn.

• Lower interest rates are good for borrowing. When you borrow money, for example when you use a credit card or when you take out a car or home loan, you want a lower interest rate because this lowers the total amount that you will pay back.
• Higher interest rates are good for saving. If you're saving money, for example by investing it, you want a higher interest rate because you gain that extra percentage of interest and increase the total amount that you earn.

What is compound interest?

Compound interest is the interest you earn on interest you have earned. When the money you earn through interest is added to the initial amount, this new amount earns interest as well. When this is repeated month after month, the entire sum grows exponentially! This process is known as compounding, as shown in the table below:

Compound interest can work AGAINST you if you're borrowing, and FOR you if you're saving. It either adds to the debt you have or makes the money you save grow faster. This is why it's smart to do your research and see how you can take advantage of low interest rates when borrowing, and high interest rates when saving.

Are interest rates in your control?

One of the main reasons people don't pay specific attention to interest rates is because it seems like all increases or decreases in interest rates are out of our control. But that isn't necessarily the case.

Discovery Bank clients can benefit from personalised interest rates through Vitality Money. Discovery Bank is the only bank in South Africa that offers you Dynamic Interest Rates, allowing you to save more and pay less when you manage your money well.

Improving your Vitality Money status improves your interest rates:

• Get up to 3.5%% on positive balances in your transaction and credit card accounts
• Get up to 4.25%% on your Demand Savings Accounts
• Get up to 4.75%% on 24-hour Notice Savings Accounts
• Pay up to 6.75%% less on your borrowing rate.

How to work Dynamic Interest Rates in your favour

Discovery Bank clients who engage with Vitality Money can lower their borrowing costs. They can also increase the cash earned on savings and the positive balances in their transaction or credit card accounts.

How? It's simple. There are five key financial behaviours that determine how financially strong you are. By improving them, you can earn Vitality Money points. The total number of Vitality Money points you earn determines your Vitality Money status, which then determines your rewards and Dynamic Interest Rates.

To get started, set up Vitality Money on your Discovery Bank app and complete the Vitality Money Assessment to get rewarded for managing your money well.

Not a Discovery Bank client?

You can still use our free Vitality Money calculator on the Discovery website. You can use this tool to see how you are managing the five key financial behaviours, and you'll even see what your Vitality Money status, rewards and interest rates would be if you joined Discovery Bank.

Remember, little differences in the percentage of interest rates can have long-lasting implications. So, before you borrow money or start saving, it's worth researching where you'll get the biggest benefits in the long run. Now that you understand the implications, let it prompt you to make one small change to manage your money better today!

This article is meant only as information and should not be taken as financial advice. For tailored financial advice, please contact your financial adviser.