monthly interest?

gazport

which is better interest paid monthly or paid yearly ie which give me more

whambamboo

monthly gives slightly more, because you get interest on the previous months' interest, and is also more convenient because you can close your account after getting your interest.

AER is the equivalent annual rate.

For interest paid yearly, the AER is the same as the simple interest rate.

So 5.25% paid monthly would result in the same total interest paid after 1 year as a 5.38% annual rate, so it's called 5.38% AER.

You can convert from monthly to annual interest by calculating (1+(annual interest/12))^12

But generally the AER is always quoted.

Hanxx

Yeah, but it just looks better when the interest is added monthly. You can see the results of all the saving throughout the year. For that reason, I prefer monthly interest without doubt.

ReportInvestor

Alternatively you can set up a spreadsheet to see how you are doing in theory - even if your account only paid annual interest.

Before I bought my house I used to have one where I updated one number at the end of each month and the whole page altered very satisfyingly .

Milarky

For two accounts paying identical AERs - one paying monthly and the other annually then annual is best unless you are a non-taxpayer

The difference is very small but boils down to the fact that tax taken each time it is paid cannot be used generate any further interest.

Example two accounts 5.0 AER

Account 1 (monthly) '5.0 AER' '4.89 gross' thats 4.89/12 monthly - 0.4075%
tax at 20% - 0.0815% - net paid 0.326% per month
Over 12 months this net payment is the one that compounds - not the gross one. i.ei you get

1.00326 x 1.00326 x 1.00326 x 1.00326 x 1.00326 x 1.00326 x
1.00326 x 1.00326 x 1.00326 x 1.00326 x 1.00326 x 1.00326 = 1.0398291

i.e that's a net return of 3.98291%

Account 2 (annual) '5.0 AER' '5.0 gross' that's just 5% after one year or 4.00000%

Both are the same AER but the one with the longer period pays that wee bit more

(For non-taxpayers there would be no difference however)

And whilst I agree it is nicer to see it paid monthly - not every account will offer this as an option of course

matt4504

I just prefer monthly as I like to see my money grow. I know it's still gaining interest when done yearly but it's just nice seeing a quid or two coming into my account a month

Dagobert

For tax-payers, annual interest payment will yield more: [thread=93631]monthly interest leaves tax-payers out of pocket[/thread].

Dagobert

whambamboo wrote:

monthly gives slightly more

It doesn't - see above.

whambamboo wrote:

monthly ... is also more convenient because you can close your account after getting your interest.

When an account is closed, the interest accrued up to that point is credited on closure. Therefore monthly interest is of no particular advantage in this case either.

Milarky

Dagobert wrote:

For tax-payers, annual interest payment will yield more: [thread=93631]monthly interest leaves tax-payers out of pocket[/thread].

I know Dagobert likes going into details so I've just worked out the 'limit' to this process.

It turns out that, in the example of 5%, with infinite compounding, the net rate for a 20% taxpayer can't be any less than 3.9803893%! Remember that with no compounding for one year it would be 4.0000000% and if compounding each month with 20% deducted it would be 3.9829100%. This further difference is 0.0025207% - and the original difference (from 4%) was 0.01709%. Thus, at 5%, the differential from one year to monthly is about 7/8ths of the maximum possible differential.

Method:
Use the base of the natural logarithm e, and the natural log ln, and the result follows:

'5.00% AER' -> '(e ^ ln 1.05) - 1} 'gross'

therefore

0.8 x '5.00% AER', = 4.0000000% -> '(e ^ SIZE=1]0.8[/SIZE] x[I] ln[/I] 1.0[B]5[/B) - 1} 'gross', = 3.9803893%