What is interest capitalization? | What do you need to know?

Although in recent years savings deposits have lost some popularity, still a lot of people decide to multiply the money saved in this way. After all, this is one of the safest, if not the safest way to invest – the risk that the bank will not pay us our receivables after the term of the deposit is almost non-existent.

It should be remembered, however, that investment returns are therefore very small. This is mainly due to their low interest rates. Moreover, not everyone is aware of the fact that the final earnings are also affected by the frequency of capitalization. Just what is interest capitalization ?

What is the capitalization of interest?

What is the capitalization of interest?

The answer to the question of what capitalization of interest means is much simpler than you might think. The capitalization of interest is nothing other than the bank’s adding of interest, not only its own contribution, but also the amount of interest already accumulated.

At the moment when interest is capitalized, our base total increases – therefore the next capitalization is already calculated from the higher amount. Our contribution is capitalized separately, and interest separately, and this is the title capitalization of interest. It is easy to conclude that the more interest is capitalized, the more profitable the deposit is.

The frequency of capitalization can be very different – from annual, semi-annual, quarterly or monthly capitalization. There is also such a thing as monthly, daily or weekly capitalization, but if we meet it, it is probably not at the deposit, but at the savings account.

As a rule, annual capitalization can be encountered, for a very simple reason – it is much cheaper for a bank. If interest accrues once, after the end of the annual deposit, they will only accrue on the sum paid. In the case of more frequent capitalization, it earns and multiplies, not only our contribution, but also the interest accrued to it with each subsequent capitalization.

How much can you earn on interest capitalization?

Capitalization of interest will always be more favorable than capitalization of the base sum itself. How much more you can earn thanks to more frequent capitalization depends on several factors.

The interest rate on the deposit is very important because it is based on it that both the base sum and interest will be capitalized. However, even a relatively high interest rate will not allow you to earn a lot if the amount paid is small. The more funds deposited on the deposit, the more you will earn on it.

The ideal situation is a large base sum, frequent capitalization and high interest rates – in practice, however, such good offers are not found.

However, one can say a lot about what interest capitalization is , but a practical example will work best and most effectively. Let’s consider an example deposit placed on:

  • 10 thousand zlotys
  • 1 year
  • 5% interest rate.

In the case of the most probable annual capitalization, the net investment profit would amount to PLN 405.12. Net, i.e. after deducting the mandatory tax on capital gains, i.e. the so-called Belka tax. It amounts to 19% and is calculated each time interest is capitalized. In this case, Belka’s tax would amount to PLN 95.04.

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