Making your money work for you

Harnessing the power of interest, compound interest, and interest rates can help you grow your money much faster, and the good news is it doesn’t have to be complicated.

When you put money into a savings account, your bank or financial institution rewards you with a percentage of the money saved in return for keeping your money with them. This is called interest.

Interest helps to grow your savings. The higher the interest rate your savings attract, the faster those savings will grow. 

Look for accounts offering an interest rate higher than the rate of inflation, where available, which is the rate at which the prices of goods and services increase. Otherwise, the real value of your savings may decrease. And remember that you may have to pay tax on the interest you earn.

Choosing the right savings option often requires weighing up the interest rate offered and the terms and features it comes with. For example, savings accounts offering higher interest rates may require you to:

• Keep your savings in place for a defined period
• Give notice to access your savings
• Invest a minimum (or maximum) sum each year or specified period

In contrast, a flexible savings account, offering instant access, is likely to offer a lower interest rate.

Where you choose to deposit your savings will depend on what you're saving for. If you're building an emergency savings fund, for example, you'll probably want immediate access to your money, so an account offering instant access would be important. However, if you're saving towards a deposit for a house, an account offering higher interest, but which requires giving notice to access your savings, may be a better option.

Compound interest refers to interest earned on previously earned interest. The longer you save, the more the interest you earn compounds. Compound interest quickly mounts up, and can significantly increase your savings over time.

Let’s say you make a regular deposit of EGP50 each month (EGP600 over a year) into a savings account, earning 3% interest annually. After one year, you'll earn EGP9.75 interest. By the end of the third year, however, you have EGP83.25 in interest, because you earn interest on the total balance (that already includes interest earned in the first two years).

The earlier you start saving, the more time you have to earn compound interest. It’s a good idea to make regular deposits, if you can, to keep your money growing. It’s also best to avoid taking money out of your savings account as that reduces the amount of interest you’re earning.

In times when interest rates are low, you may want to consider other ways to make your money work for you. These can include:

1. Paying off debt - the interest on borrowing is usually higher than the interest earned on savings, so it may be better to pay off high-interest loans and debt.
2. Overpaying on your mortgage - if you have a mortgage and it allows you to make additional payments, you can use savings to cut years off the term and potentially save a lot of money in interest. Some banks offer offset accounts, where any additional funds sitting in the account reduce the interest paid on the original sum owed.
3. Fixing savings rates – Unless you need fast access to your savings, you'll usually earn more interest if you move your money from a regular savings account into term deposits (fixed-rate savings).
4. Consider investing – While there is a greater risk to investing your money, rather than saving it, this may be worth considering to help you achieve longer-term savings goals. You may also be able to invest sustainably, in line with your values. The good news is that it's possible to invest with a conscience and have the potential to make a profit at the same time.