Trying to Get started

Mickyk

This may be a pretty stupid question to the seasoned veteran on here, but then again thats why I am posing it, if you take out a monthly savings account, currently looking at the HSBC one for anyone who brings their bank account to them as well @ 8%. Is the interest compounded monthly, or is it paid annualy on the lump sum, ie:
Month 1 £200 + 8% = £216
Month 2 (£216 + £200) + 8% = £449.28
etc
or
(12 x £200) + 8% = £2592
My monthly investment obviously being £200

If my numbers are correct, which they usually are the monthly compounded would earn much more.

Thanks in advance :beer:

Lokolo

8% is the ANNUAL rate, not the monthly rate!

If interest is paid monthly, then it would be ( £200 * 8%) / 12, so Month 1 would earn £1.33, not £16.

You would only get the compound if interest is paid monthly inside the account, which I don't know if it does or not.

rb10

Neither - it's calculated daily at 8%.

So if your balance in the first month is £200, you'll accrue about £1.33 before tax. Then in the second month, with a balance of £400, you'll accrue about £2.66 before tax.

Saving £200 per month for a year would give you approx £104 gross / £83 net interest.

Nikel

Interest is earned monthly at (8/12)% each month but not added to the account till the end of the year. So you would have £1.33 in month 1, £2.67 in month 2 etc but only get £104 at the end of the year.

Mickyk

One quick add-on question, with ISA rates being so low, would it be more feasable to keep it in a normal savings account of even 4% and pay the 20% tax on the interest over the current 2.85% untaxed?

gt94sss2

Mickyk wrote: »

This may be a pretty stupid question to the seasoned veteran on here, but then again thats why I am posing it, if you take out a monthly savings account, currently looking at the HSBC one for anyone who brings their bank account to them as well @ 8%. Is the interest compounded monthly, or is it paid annualy on the lump sum, ie:
Month 1 £200 + 8% = £216
Month 2 (£216 + £200) + 8% = £449.28
etc
or
(12 x £200) + 8% = £2592
My monthly investment obviously being £200

The 8% is an annual rate not a monthly one.

This means that if you invest £250 a month, you will save the maximum balance of £3000 during the 12 month term, and at 8% interest, you will earn approximately £130 interest (gross).

Saving £200/month would get you £102.78 interest/year.

MSE has a calculator here which will calculate your return for you.

Regards
Sunil

DavidHayton

Alas it is not as good as that. the 8% that they quote is an annual rate.

Therefore you get 8% on your first £200,
but only 11/12 * 8% on your second £200,
and only 1/12 * 8% on your last £200 (because it is only in the account for 1/12 of a year).

Thus the average rate on your £2400 will be 6.5/12 * 8%, or 4.33%, and your £2400 will therefore yield £104 at the end of the year (before tax).

Note, the actual return will be slightly different because months have different numbers of days, and banks work to the nearest day.

Hope this helps, David

Lokolo

Mickyk wrote: »

One quick add-on question, with ISA rates being so low, would it be more feasable to keep it in a normal savings account of even 4% and pay the 20% tax on the interest over the current 2.85% untaxed?

4% is 3.2% after 20% tax and 2.4% after 40% tax.

In future, to work it out you need to times the rate by 0.8 for 20% and 0.6 for 40%. (so I did 4 * 0.8 to get 3.2)

Mikeyorks

Mickyk wrote: »

would it be more feasable to keep it in a normal savings account of even 4% and pay the 20% tax on the interest over the current 2.85% untaxed?

If you already have the lump sum of around £2400 you were talking of drip feeding into the 8% account ..... then the arithmetic changes? As you're earning interest on the amounts waiting to go into the Regular Saver .... so you need to look at the whole picture.

With poor rates on easy access accounts Regular Savers are currently best if fed with new money direct from income. On this one you would effectively be getting an undiluted 8% on your money. But if you're drip feeding from (eg) a 3% easy access account ...... the combined interest will approximate to 5.7%.