The accrual rate refers to the rate at which interest, benefits, or expenses accumulate over some time. It is commonly used in the context of pension plans where it indicates the rate at which employees earn pension benefits for their service. In the context of interest-bearing accounts or debt instruments, the accrual rate at which interest accumulates on the principal amount.
The accrual rate is like a meter that measures how fast benefits or interest grows over time. For a pension plan, it is like a gauge showing how much pension money is being earned each year you work. In the case of a savings account or loan, it can be compared to a speedometer showing how fast the interest on your money or debt is piling up.
The accrual rate is significant in personal financial planning especially for retirement planning and for understanding the cost and payoff of loans and investments. It helps individuals and businesses calculate the future value of pensions, savings, or debt and make informed decisions about saving, borrowing, and investing.
For example, in a pension plan with an accrual rate of 2% per year, an employee earning an average salary of $50,000 would accrue $1,000 in pension benefits each year. Similarly, if a savings account has an accrual rate of 3% per annum, the interest on the deposited money will grow at this rate each year.
Source: A to Z of Economics by Dr. NC Raghavi Chakravarthy