I have just started using a debit card but i want an option for a savings account . Most saving accounts come with 0.5-1% interest rate so what exactly does that mean?
Also would like to know if this is religiously acceptable (islam) (only if anyone has that knowledge please, its alright if you dont, you can avoid mentioning it)
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Interest means that your savings account will theoretically generate more that what was put in it. For example, if you have $10,000 in an interest-generating savings account with a rate of 1%, and you never take any money out or add money, at the end of the year you’ll have $10,100 in that savings account.
I have no idea what this could mean in regards to Islam.
Look at it this way – if inflation is at 4% and your bank offers 1% interest, your money will actually devalue by 3% a year. I doubt Allah would object to that.
If you’re worried about the religious aspect you should really speak with one of your religious leaders.
Generally speaking I think religions that have problems with interest are more from the banking side: they ask you to lend money *freely* to other people and *not* take interest back.
However, it’s much more rare for one to argue it is bad if someone else wants to take your money, invest it, and pay you back some of their gains via interest. That’s more like how savings interest works. Technically the bank is loaning your money to other people and giving you back a tiny percent of that interest. HOWEVER, some people feel like that layer of indirection is still a violation of “don’t do it”.
So please don’t take internet advice for spiritual matters, take the advice of someone you see as an authority on your religion. Those people will be able to explain the answer that is most compatible with what you believe.
Let’s say you open a savings account with 1% interest. This means the money you have in your account increases by 1% each year. So if you start the year with £100, you would have £101 at the end of year. Which isn’t a great deal sadly.
If you want to make money from interest, you need a decent sum of money to begin with, and better interest rate. In the UK, you can get 5% savings accounts at the moment. So if you earn a salary, and save some each year to build up a nice cash deposit like £50,000, you would get £2,500 a year in interest.
Interest is forbidden in Islam though, and many Islamic customers tell their bank not to pay them interest. However some Sharia banks have an alternative like *’Expected Return’* which is basically the same as interest, but it’s Sharia compliant. Ask your bank about that.
> Also would like to know if this is religiously acceptable (islam) if anyone has that knowledge.
As is common in many religious traditions there are ways around religious rules. For Islam the way to avoid the prohibition against charging interest (“Riba”) is something called “Murabaha” or cost-plus financing.
Instead of charging interest, with Murabaha the seller and purchaser agree on the cost of something and an associated markup which just happens to be exactly the same amount as what would be paid in interest. They don’t pay a percentage of interest but instead pay a percentage of markup, which is totally OK because gods love technicalities.
A savings account, is basically a way that you agree to lend the bank (or other lending institution) money. Its a weird thing to think about but its important to note that when you give someone your money to store, they are borrowing it.
So banks basically work by borrowing peoples money on a short term basis and lending it out on a long term basis. If you think this seems dangerous, it is, that is why in places like the US we have the FDIC (but that is another ELI5).
A bank is borrowing your money. Why would you want to give your money to one bank over another? Well, because the bank promises to give you some money back!
Bank: Hey, lend me 30 dollars?
You: Why would I want to give you 30 dollars?
Bank: Because I will give some extra money to you in exchange for you helping me out.
You: How much?
Bank: I will give you 1 percent interest.
That 1 percent interest is mathematical expression to help you figure out how much you will get back.
In super easy math (which isn’t correct), 1% interest means 1% per period (maybe a year or something). So if you lend me $100 dollars for a year, then I will give you back $101 at the end of the year.
Now that math is super easy and it doesn’t work like that, you actually get more. 1% is annualized interest that is compounded over some period. that math gets more complicated, and there are calculators on line to help with it. But that really means you will get MORE than $1 on $100 at the end of the year. What really happens is that banks give you interest “along the way.” So at multiple times per year they will give you interest on your holdings. Not the whole 1% but a fraction of it. As a result if you deposit $100 dollars on 1/1 then by maybe 1/6 you will have something like $100.40 cents (again this is just made up math, there are calculators to figure out the real amount). BUT then on the second half of the year they apply that calculation again, except instead of starting with $100 dollars they start with $100.40. And whammo, you get something closer to $101.56 (again, made up the numbers).
SO now you next question should be “what bank should I choose?” Well, in the US, you should chose the bank with the higher interest rate as long as you are depositing less than $250,000 which is the max insurance rate for the FDIC.
Happy to clarify further if there are more questions.
When you deposit money in a bank they then lend it to somebody else and charge their borrower interest.
They pay you a lesser rate of interest in exchange for having “used” your money deposited with them. This is the savings rate that you receive.
Assuming 1%, for every $100 you have deposited with them they pay you $1 per year.
“1% interest” means that every year the bank will pay you 1% of however much money you have in your savings account.
So if you have $100,000, then the bank would pay you $1000, and you would then have $101,000 in your savings account.
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