Annual vs Monthly interest

Faelina

I'm fairly new to the whole issue of savings etc and I wonder if someone can tell me about choosing the correct option as regards to interest (I couldn't find anything when searching the site). I'm a little confused. Some accounts offer both monthly and annual interest, which is the better option?

Thanks,


Faelina

equitydealer

No difference. It's personal preference, some people like to receive interest monthly, perhaps using it for spending.

skiddy2k

i allways thought it was cumulative and if you have monthly intrest, you get intrest on the money you put into the account PLUS your intrest of the previous month... not sure about anual intrest though.
as equitydealer said, monthly intrest gives you a bit of extra bob to spend each month.
yearly intrest looks better because you can see a lump sum of money going into your account, whereas monthly has 1/12th of it

Sillychuckie

Yearly accumulates in the same way monthly does. There is no real difference with the amount of £££ you receive. Just about timing.
I prefer yearly, as I might be tempted to spend the interest I get monthly (and as a result, get less over all).

Stonk

Many accounts that offer you a choice of monthly or annual interest pay you less if you opt for monthly, even after you take into account the compounding effect of interest on interest.

In other cases - in my experience, the minority - the monthly and annual rates work out to be equivalent.

The Golden Rule is to compare the AERs.

If it says 4.85% AER for monthly and 4.85% AER for annually, then it makes no difference which you choose. In such a case, I would choose monthly, just because it's nice to see the interest coming in each month.

Mostly, however, it'll say something like 4.5% AER for annually, and 4.25% for monthly. The AER already takes into account the compounding, so in this case you'd be better off taking annual interest.

margaretclare

I agree, Stonk. It can provide encouragement and motivation, seeing the interest adding up month by month! A year can seem an awful long time to wait.

Margaret Clare

Robert_Sterling

I also agree with Stonk.

Stonk

Yes. Me too.

Faelina

Ah, great. Thanks everyone for clearing that up for me. I should have paid more attention in maths at school. Oh well!

Cheers!

skiddy2k

margaretclare wrote:

I agree, Stonk. It can provide encouragement and motivation, seeing the interest adding up month by month! A year can seem an awful long time to wait.

good things come to those who wait!.. not in this case.. doesnt matter!... i rather see a lump sum come in once a year than a little bit evey month

EagerLearner

I am with the monthly club - I like seeing that monthly add-on to my savings, keeps me motivated to keep saving, I wouldn't like to have to wait a full 12 months - the monthly option is for those of us who can't pleasure delay! Plus I try not to spend the interest each month.... if you are more of a spendaholic, and think the monthly interest may be too tempting, opt for the yearly interest to be safe ;o)

EagerLearner