What is the capitalization of the Deposit + investment, TOP 7 banks and instructions for opening

Hello! In this article we will talk about compound interest in Bank deposits, or else – about their capitalization.

Today you will learn:
  • What is capitalization of interest on Deposit;
  • How to independently calculate the profit on the Deposit with capitalization;
  • How to choose the best interest rate;
  • How to open an account with capitalization.
What is the capitalization of the Bank Deposit
One of the most popular at all times and among all segments of the population way to save money – opening a Bank debit account. But not everyone knows what the capitalization of the Deposit means and how to use it.

Almost every Bank is ready to offer private clients two types of savings deposits:

Interest under the contract is charged to a separate account, where it is accumulated separately, and the amount of the main Deposit remains unchanged.
Interest is attached to the" body " of the Deposit, thus increasing the amount to calculate further savings.
Capitalization of the Deposit (or capitalization of Bank interest) – the addition of accrued interest on the Deposit to the principal amount. On such an additional amount in the future, too, interest is charged. This system is also called "compound interest on the Deposit."

The amount of accrued compound interest increases with each capitalization period.

For example, let's imagine how the amount of the Deposit opened on June 5, 2017 will increase with a monthly capitalization at the rate of 7% per annum.
As can be seen from the example, the total amount for six months is not much different in the Deposit with capitalization and without it. But if we are talking about long-term investments, then capitalization is profitable. On how to make a profit from compound interest, we will discuss further.

Advantages of capitalization deposits
As we have already seen above, capitalization allows you to increase the contribution more efficiently than the standard accrual of interest.

What is the benefit of capitalization for investors:

The Deposit amount is growing faster due to" compound interest", and the growth rate is constantly increasing throughout the Deposit period.
Capitalization can be calculated without special knowledge of the economy. The system of interest calculation is transparent and available to everyone through special formulas and online calculators.
Investment in deposits with a market capitalization pays off in the long-term contract. If the purpose of the Deposit is to make free money work, and there is an opportunity to wait for several years, then such a contribution is a very affordable and simple solution to the problem.
Calculation of capitalization
Calculate what the total amount you will receive taking into account the capitalization of any frequency, you can use the formula: PV*(1+r/m)mn, where:

PV is the initial Deposit amount;
r-annual interest rate;
m-the number of interest charges per year (for example, if capitalization occurs quarterly, m will be 4);
n – number of years for which the Deposit is opened.
It turns out that if we open a Deposit of 150 000 euros, at 7% per annum, with capitalization once a month, in 2 years we will receive: 150000*(1+0,07/12)12*2 = 172 335 Euro

Another, more in-depth version of this formula is PV*(1+rj/100K)n, where the new variables are:

j - number of days in the period for which interest is accrued;
K - number of days per year;
The degree n is the number of capitalization throughout the contract.
Using the same initial data, we obtain: 150000*(1+7*30/100*365)24 = 172 335 Euro

In fact, both of these formulas, like some others found in banks, are absolutely equivalent. The names of the variables may also differ, but the principle of the ratio of the interest rate and the frequency of accrual of compound interest remains unchanged.

It is possible to calculate profit on any Deposit not only by means of formulas, but also thanks to electronic assistants.

These include:

Online calculators;
Banking calculator applications for smartphones;
Special Deposit calculators for Windows.
Personal income tax and refinancing rate
In search of the highest interest rate on the Deposit, do not forget about the possible excess of the refinancing rate. If the Deposit rate exceeds refinancing + 5%, personal income tax (35%) will be withheld from the difference threshold.

For example, the Deposit amount of 200 000 euros, the Deposit rate of 16% per annum. Refinancing rate-10%.

10%+5%=15% ;

16% > 15%, which means the Bank will be withheld personal income tax.

For one year, the Deposit profit will be 32 000 euros the Maximum income tax-free-30 000 euros with the difference between these values will be withheld 35%, in our example is 700 euros

The timing of the capitalization of deposits
The terms of capitalization of each specific Deposit are described in the agreement concluded between the Bank and the client.

For example, capitalization can be done once a day or a week, and once a year or six months. In Germany, it is extremely difficult to find reliable deposits with capitalization more than once a month, so we can say that such a frequency exists only in theory.

Daily capitalization provides the maximum rate of growth of compound interest, and with them the amount of the Deposit. But in Russian banks, this frequency is practically not found.

The more often capitalization occurs, the greater the benefit the investor will receive. Let's see this on the example of the Deposit opened on July 1, 2017 for the year with the initial amount of 50 000 euros, at 6% per annum.
The effective interest rate on the Deposit
This definition means a Deposit rate that will give the same yield on the Deposit with capitalization and without it. It is very important to be able to determine the effective interest rate in order to objectively compare the offers of different banks and different tariffs.

It is clear that two deposits with the same capitalization terms will have the most profitable one with a higher interest rate.

But if the proposals differ not only in interest, but also in terms of timing, as well as the presence or absence of capitalization, it is most convenient to bring them to one denominator by the formula: (1+R/m)m—1, where:

R-interest rate under the contract;
m - number of capitalization periods per year.
Example. A year after the opening of the Deposit of 150 000 euros at 7% with monthly capitalization, we get 150000*(1+0,07/12)12 = 160 785 Euro

What should be the interest rate to increase the same amount for the year, but without capitalization? 160785/150000=1,0719-1 = 0,0719, i.e., 7.2 per cent.

Conclusion: in our example, the contribution with the capitalization of 7% per annum cheaper than the contribution at 7.1 percent without capitalization.

How to open a Deposit with capitalization: step-by-step instructions
To open the contribution with the capitalization quite simple. As the saying goes ," any whim for your money." Banks are willing to accept the savings of citizens for storage, but do not always offer favorable conditions in return. About how to deliberately approach the opening of the Deposit and avoid mistakes, we will discuss further.

Phase 1. The choice of Bank.

Today, depositors are faced with a truly wide range of banks. Many progressive companies offer to make a Deposit online, even to residents of other cities.

Registration and geographical availability of the Bank have ceased to be significant parameters. Therefore, the choice of the Bank to open a Deposit is now based on other characteristics.

These include:

Rating of bank;
A reviews;
Its financial position.
Will help in choosing the site of the German Banks-there you can find a lot of useful information for each Bank registered in the territory of DE.

Not every Bank provides Deposit insurance. If the Bank participates in the state insurance program and makes contributions to the special Fund, in case of its closure or revocation of the license, the clients will be returned their invested funds.

At the first stage, you can stop at several banks with the best reputation, and then begin to study their proposals for deposits.

Phase 2. The choice of contribution.

When choosing a Deposit, you need to compare several offers for:

Interest rates (the more-the better);
Terms of capitalization (the more often-the better);
Terms of placement of funds (for how long you are willing to abandon the use of savings);
Currency of the Deposit body and accrued interest (sometimes the main Deposit remains in rubles, and interest is calculated in the currency according to the current exchange rate);
The presence of prolongation (extension of term of the Deposit);
The possibility of replenishment and withdrawal, early closure (replenished deposits can bring even more income, and for long-term investments will not be superfluous the possibility of partial withdrawal of funds without loss of interest).
We have already mentioned the calculation of the effective interest rate, which allows you to bring several different deposits to the same denominator.

Consider another slightly different version of this formula: (1+R/100/m)m/n—1.

We left the variable designations the same:

R - annual interest rate under the contract;
m-number of capitalizations per year;
n-number of years.
So you can calculate the actual percentage of accrual, which is used in deposits.

Example. The actual interest on the Deposit for the year with a monthly capitalization of 6% per annum and an initial amount of 110 000 euros, will be equal to(1+6/100/12)12/1—1 = 1,062-1 = 6,2%

Phase 3. Account opening.

When the Bank and tariff are selected, you can take your savings and go to the Bank. When determining the Deposit amount, be careful not to give the Bank all your capital.

Most fares do not allow for painless early cash withdrawals.

From the documents only need a passport, all other papers are issued in the Bank. Previously, the list of documents can be specified in the Bank, as each organization has the right to make its own changes in the order of registration of the Deposit.

The agreement with the Bank must be carefully checked before signing:

Are passport details correct;
Do the conditions, the amount and the procedure for calculating interest coincide with the previously agreed;
Can the Bank change the interest rate;
To what date the contract is valid and whether automatic prolongation is provided.
Now many banks offer the opportunity to open a Deposit online. The terms of this service can be specified on the website of the Bank or its operators.

Tips for opening a Deposit
Summing up, we will name a few tips that will help beginners not to get lost when opening a capitalized Deposit:

Check the effective interest rate. Not always what calls the "best" advertising and commercial offers, it is really. The formula by which you can make a calculation, we gave earlier in our article, but you can also use the online calculator.
High interest rates are not as important as the Bank's reliability.
Carefully read the contract and pay attention to the "pitfalls". All kinds of fees (for SMS notification, for online banking), automatic extension of the Deposit on unfavorable conditions for you and so on. Not everything managers in the Bank are willing to say for yourself.
Objectively assess your financial capabilities. If the capital is not needed in the next few years, it makes sense to conclude a long-term contract with a pleasant interest. If such confidence is not present – will not prevent insurance in the form of the possibility of early closure of the account without loss of interest.
Top 8 most reliable banks in Europe
Zürcher Kantonalbank-Switzerland
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