Regular Savings accounts - interest is less than you expect

shindigger

chaddman wrote: »

Regarding regular savings accounts.
My understanding is that the interest you receive is actually less than you would think.
If, say, an account advertised 6%, then you would receive 6% on the investment in the first month, 11/12th of 6% for the 2nd month, 10/12th for the 3rd month etc. Of course each month only earns 1/12th the full years interest. So in fact the true interest rate is actually:
(12/12 + 11/12 + 10/12 + ……. 1/12) all divided by 12
This comes to about 0.54.
So if you were to invest a lump sum of say £1200 at 6% then before tax you would earn £72
But if the money went into a regular savings account at 12 lots of £100 per month at 6% then you the pre-tax interest would only be about £38.90 (which is 0.54 of 6% or 3.24%).
I was actually told this by someone at Halifax a few years back and advised me to invest a lump sum instead. But most banks/building societies tend to keep quiet about this!

f you have a lump sum, find the best rate, deposit £50k and leave it there.
Unless you are starting from scratch, regular savings accounts are a total waste of time and effort.
Im amazed at how hard this is for some people to get their head round. Unless the "illuminati" on here want to show me how im wrong.:cheesy: Or unless the rate is 15% and you can deposit £5k a month. not found one of them yet.....

rb10

shindigger wrote: »

f you have a lump sum, find the best rate, deposit £50k and leave it there.
Unless you are starting from scratch, regular savings accounts are a total waste of time and effort.
Im amazed at how hard this is for some people to get their head round. Unless the "illuminati" on here want to show me how im wrong.:cheesy: Or unless the rate is 15% and you can deposit £5k a month. not found one of them yet.....

If you have, say, a lump sum of £3000, you can ...

(i) Go for the best Regular Saver account, Barclays, at 6%, earning yourself approx. £97.50,
AND drip-feed into this from the best instant access account. Difficult to say how much you'll earn here, but say, for example, 2.5% for a year, would get you an extra £34.37.
So the total here is £131.87.

OR

(ii) Get the highest fixed account you can, which, according to this, is 3.9% (although from a high street bank it's lower). This would give £117 over a year.

So the Regular Saver is better.

sloughflint

chaddman wrote: »

No 'rb10' I stand by my belief that you only get 0.54 of the quoted interest.

Welcome to MSE chaddman.

I am sorry about the tone of some of the posts in this thread.

I can only put it down to exasperation since this topic is discussed fairly frequently. Many people have a misunderstanding about this.

Some of what you say is on the right lines ( referring to 54%) but I think maybe you are mixing up interest rate with pure interest.

If you had a lump sum available,by paying £250 each month into a regular saver paying 6%, and kept the surplus in a nil interest paying account,at the end of the year this would have the same end result as keeping the £3000 in a fixed rate account paying 54% of 6% ie 3.24%.

But you are mistaken to say the interest rate is 3.24%. It isn't. It is 6%.

In reality the funds would be drip fed from an interest paying account and that would need to be factored into your overall comparison of regular vs fixed.

Have you seen this article?
http://www.moneysavingexpert.com/savings/best-regular-savings-accounts#dripfeed

vesilintu

rb10 wrote: »

It was clealy someone who did not properly understand Regular Savers who told you that. The interest is only less than you think if you do not understand how interest works.

If the Regular Saver has a rate of 6%, then you are getting 6% throughout the whole year. It is just that for part of the year, you only have a smaller balance, so obviously you will accrue less interest during that time.

If there was a fixed term account paying 6% and a Regular Saver paying 6%, then you would be better off putting the money in the fixed term account.

However, whilst a 6% (or nearly 6%) Regular Saver account is fairly easy to come by at the moment, I challenge you to find 6% on a fixed term account. As the rates on these are more likely to be 3-4% max, you will probably be better off by drip-feeding money into a Regular Saver than by putting one lump sum in.

I appreciate the posting but am still confused. I was about to open one of these accounts and was told by a friend today, in no uncertain terms, the same thing that chaddman said. I am looking for ways to spread around a lump sum. Putting bulk in Investec, and my bonus cash isa, and bonus websaver account, but would like to know if there is anything else. Do you have any suggestions for a bit of a financial greenhorn--not dumb, just not au fait with this stuff. (fairly recently divorced after long marriage) I would appreciate anything you might be able to tell me. Vesilintu

sloughflint

vesilintu wrote: »

I appreciate the posting but am still confused. I was about to open one of these accounts and was told by a friend today, in no uncertain terms, the same thing that chaddman said. I am looking for ways to spread around a lump sum. Putting bulk in Investec, and my bonus cash isa, and bonus websaver account, but would like to know if there is anything else. Do you have any suggestions for a bit of a financial greenhorn--not dumb, just not au fait with this stuff. (fairly recently divorced after long marriage) I would appreciate anything you might be able to tell me. Vesilintu

Hi Vesilinto.
Perhaps rb10's post 23 helps a bit more.

Following on from my last post, if you are considering whether to drip feed a lump sum into a regular saver is more worthwhile than placing into a fixed bond, it is worth calculating the combined interest rate from feed and regular savings accounts:

54% of regular saver rate plus 46% of feed account rate.

Using rb10's example, that would have been:
0.54*0.06+0.46*0.025= 0.0439

In other words 4.39% which was better than the 3.9% bond he/she found.

( Bear in mind though that the feed accounts are usually not fixed rate accounts)