Does a 5% Savings Plan Pay 5%?

Picture a plan where you deposit 100,000 won twelve times, once a month. The first 100,000 won stays in the bank for all 12 months, so it earns the full 5% a year. But the second month's money stays 11 months, and the last month's money sits for just one month before the plan matures.

Add up those months and you get 12+11+...+1 = 78 months. One month of interest on 100,000 won is about 417 won, so multiplying by 78 gives 32,500 won in interest before tax. If you had left the same 1.2 million won in the bank all at once for a year, it would have been 60,000 won, so this is almost exactly half. The rate stays the same, but the money spent less time working.

Many people assume the interest shown in their account is the pre-tax amount, but in Korea interest on a regular savings plan is taxed at 15.4%. That figure combines a 14% interest income tax and a 1.4% local income tax. Take 5,005 won from 32,500 won and the interest that reaches your hands is 27,495 won.

Even on pre-tax interest alone, a 5% savings plan works out about the same as leaving 1.2 million won in the bank from the start for a year at roughly 2.7%. This structure is also part of why installment plan rates look higher than fixed deposit rates. That does not mean the plan is a bad deal, though. A big advantage of an installment plan is that it builds the habit of saving steadily every month.

When choosing between an installment plan and a fixed deposit, it is more accurate to line up the interest you receive at maturity than to compare rate figures. Banking apps and the financial product comparison service run by Korea's Financial Supervisory Service show pre-tax and after-tax interest as soon as you enter a monthly amount and a term.

If you already have a lump sum, putting it into a fixed deposit all at once may earn more, while an installment plan suits saving a little from each paycheck. Be sure to check the conditions for bonus rates, too. The top rate printed large in ads is often the figure you get only after meeting every condition, such as card spending or automatic transfers.