Drip Feeding Please Explain

Balaclavaman

Hello,
Can anyone explain drip-feeding from top saver to regular saver accounts.
Surely your losing the intrest on your top saver
Cant you simply drip-feed between two top saver accounts ??
I have read & re-read Martins explaination but my eyes keep glazing over.

Thanks in advance.

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If it wasn't for bad luck i'd have no luck at all

sloughflint

Balaclavaman wrote: »

Hello,
Can anyone explain drip-feeding from top saver to regular saver accounts.
Surely your losing the intrest on your top saver
Cant you simply drip-feed between two top saver accounts ??
I have read & re-read Martins explaination but my eyes keep glazing over.

Thanks in advance.

---

If it wasn't for bad luck i'd have no luck at all

Let's say you had some savings accumulated and they were sitting in an instant access savings account and you didn't need the funds for a year.
Rather than leave them there for a whole year, it works out better, bit by bit withdrawing from that account and transferring into a RS.

Not only do you get interest on the savings still in the instant access account but you also get interest on the funds in the RS as the amount increases.

sloughflint

If you are happy with maths, to get an idea of how much harder your money is working for you:

You have £ 3000 spare sitting in a 4% paying account and there is a RS that pays 6% but only if you fund a maximum of £250 per month.

You deposit £250 each month in the RS from your instant access account.
So £250 earns 6% for 12 months then another £250 earns 6% for 11 months and so on until the last £250 earns 6% for 1 month.
Now think of that being similar to saving a total of £250 for ( 12+11+10+...+3+2+1=78 months = 6.5 years)

Meanwhile your instant access account has £250 earning 4% for 1 month ( the last month), another £250 for 2 months, and finally another £250 for 11 months. That is similar to saving a single £250 for ( 1+2+3+...+9+10+11=66 months =5.5 years) at 4%

So the total interest will be 6.5 years on £250 @6% and 5.5 years on £250 @4%
250*(6.5*0.06+5.5*0.04)= 250*0.61=£152.50
which on £3000 is an equivalent to 152.50/3000=0.0508 ie 5.08% gross rather than your 4%.

CLAPTON

the principle is only relevant if the regular saver has a higher interest rate than your other savings

sloughflint

It's always worth checking out fixed term rates. The last time I looked into it, the RS route was better.
edit: is that what you meant Clapton? I was a bit confused by your post.

Balaclavaman

Hello Sloughflint,
Are you saying not to use the drip feed method and stick to a regular saver option instead. ?????

sloughflint

The drip feed method involves two accounts
1) an instant access savings account
2) a regular saver acount

The thing to compare is what other rates are available eg fixed term bonds.

Putting it another way:
If you do this calculation:
(5.5*A+6.5*B)/12
where A is your proposed instant access account interest rate and B is your proposed regular saver rate, you can decide if there are any fixed term rates better at the moment.

So using above example (5.5*4+6.5*6)/12= 5.08%. If there was a one year fixed account paying 5.5%, then that would be a better place to put your savings that don't need to be touched.

If there are fixed term bonds that are better, then forget both the regular saver and instant access account.

Others will probably be able to give you a better idea on what's good at the moment. I am keeping all savings untied at the moment so don't know what the rates are like.

vulcan59

When drip feeding from a savings account to a regular saver, you need to remember that a certain amount of interest may [1] be lost during the time the money is transferring. Worst case is savings -> current account -> regular saver. This will have an effect on the calculations as described by sloughflint.

[1] I say "may be lost" because if both accounts are with the same institution then the transfer could happen immediately.

Mikeyorks

Balaclavaman wrote: »

Can anyone explain drip-feeding from top saver to regular saver accounts.

It's just like a sand filled egg timer. You start off with all your money sitting in the 'top saver' area. Then you turn it over and ... over the year ... it feeds from the 'top saver' and into the Regular Saver (RS).

But the way you feed it isn't quite even. So you have the equivalent of the whole sum in the 'top saver' for just under under half the year (circa 46%) .... and get the interest on that account accordingly. And you get the equivalent of the whole sum in the RS account for just over half the year (circa 54%) ..... and get that interest accordingly.

So it immediately becomes clear that it's only beneficial if the RS interest rate exceeds the 'top saver' rate by a margin? E.G. .. I gave up on the 7% Halifax RS and feeding it from an adjacent 5% Websaver (oh ... those good old days!) because the distinction was unappealing ..... easier to take the £6k and stick it in Fixed Rate at 7% + for the year? But I'm happy to contribute to the 12% Halifax RS that was available back in Aug (?) ..... as the benefit is clear.

RS's are at their best if you contribute 'new money' from current income. As the overall rate isn't diminished by holding the money in a lower rate account initially. But if you're re-cycling existing money .... you need a beneficial disparity in the RS interest rate in order to make it worth while?

Cant you simply drip-feed between two top saver accounts ??

..... unlikely to be any benefit whatsoever? Even if one has a much better interest rate - why not simply put all your money into the better one in the first place? I think you're missing the fundamental of Regular Savers ..... in that they are carrots dangled essentially to get in new money. But as a consequence of the enticing (used to be!) interest rate - there's a limitation on how much you can put in. Hence they are very attractive to put new money into, as you get the undiluted headline rate. But slightly less attractive to re-cycle existing money ..... as the RS rate is diluted by the fact your money sits in a poorer paying account whilst awaiting it's turn to be 'fed'.

sloughflint

I like the egg timer analogy.

For another visual idea:
http://spreadsheets.google.com/pub?key=pLv5pWbQddSKWBLDYhhLQWA

Balaclavaman

Mikeyorks also answered my next question, that with the poor intrest rates this method offers very little return at the present time and is probably not worth persuing. If anyone knows better please reply.

Sloughflint - excellent graph

Thanks to all who answered my question.