Interest calculations...A lesson learned the hard way, or is this just wrong?

oldfella

the difference is that you only get 3.25% if you leave your money there for a whole year. If you have £50K in the account for only 6 months, you will get something like £10 less interest on the Egg compound daily, compared to a normal compound annually.

CLAPTON

oldfella wrote: »

the difference is that you only get 3.25% if you leave your money there for a whole year. If you have £50K in the account for only 6 months, you will get something like £10 less interest on the Egg compound daily, compared to a normal compound annually.

how is that then?

xrjtg

When you go from ideal, continuous time interest to your chosen discretisation you introduce errors, which you solve by tweaking the rate so that the answer comes out right over a year. If you calculate interest more or less frequently you will need to choose a different fudged rate: and there's no reason why these fudged rates should give the same answer for anything other than the "fudge period" of one year.

oldfella

because the daily interest is equivalent to a gross of about 3.2% - compounded daily this produces 3.25% over a year, over 6 months it produces about 3.22%

bendix

This thread makes me very very depressed indeed.

It beggars belief that someone thought they would get the full interest on the amount that was in the account at year end, even though it must be patently obvious to them (because they were building it up monthly) that all that final balance wasn't in the account for the full year.

God help us. I despair.

oldfella

Bendix - its more complicated than that, the issue is that Egg dont make it obvious they are paying 3.2% daily compound, they advertise it as 3.25% Gross/AER. The details are hidden in the depths of the T&Cs.

Reaper

No, I think Bendix is right. The original post says

ClassicalMusicFan wrote: »

I saved very hard over the last 12 months, putting a over a couple of hundred pounds aside each month... I had assumed that at the end of the year I would receive 3.25% of the final figure in my account.

I too find it surprising people think they could, say, open an account for £1 then temporarily put a huge lump sum in the day before the end of the year and expect to earn a year's interest on the full amount.

After that the thread moved on to the more marginal topic of why a 3.1985% interest rate was quoted instead of the advertised 3.25%

tuggy12

opinions4u wrote: »

Egg are unusual in that they compoind the interest daily.

Not true, every bank I currently have funds in does this, except where the funds are invested for a fixed period and the interest is added on maturity.

YorkshireBoy

tuggy12 wrote: »

Not true, every bank I currently have funds in does this, except where the funds are invested for a fixed period and the interest is added on maturity.

Most savings providers compound either monthly or annually, ie whenever they pay interest.

I think Egg *are* unusual in that they compound daily. If not, then they're certainly unusual in that they're the only provider I know of who say, in their T&Cs, that they compound daily.

Do you have a link to your providers' T&Cs so I could take a look?

dunstonh

Not true, every bank I currently have funds in does this, except where the funds are invested for a fixed period and the interest is added on maturity.

That differs from those I have come across in my experience. Most accrue interest on the daily balance and apply it to the account on a certain frequency but wont compound it daily. It only gets compounded when its added to the account. As already mentioned, Egg compound it even though it hasnt been credited to the account.