monthly interest

maypole

Am I losing out by having interest paid monthly instead of annually. I have account paying 5.22% monthly, but 5.35% AER. Grateful for advice.

Maypole

codetown

If the interest is still deposited on the same account, you will receive composite interest on interest. In that case the AER is what you achieve after a year anyway even if you get it in monthly installments (assuming you don't spend the interest in the meantime!)

Dagobert

codetown wrote:

If the interest is still deposited on the same account, you will receive composite interest on interest. In that case the AER is what you achieve after a year anyway even if you get it in monthly installments

Not if you are a tax-payer, see [thread=93631]monthly interest leaves tax-payers out of pocket[/thread]. Admittedly, the difference is only marginal though.

maypole

Thank you for replies.

I don't pay tax, but I want the interest paid to a current account in another bank to use as monthly income.

tom188

Then you will earn slightly less per month

Average monthly rate with compounding (repaid into account) = 0.4458%.
Monthly rate = 0.4353% without compounding (paid away).

maypole

Thank you for that Tom. Might have to do something different.

Thanks for all the replies.

maypole.

Robert_Sterling

maypole wrote:

Am I losing out by having interest paid monthly instead of annually. I have account paying 5.22% monthly, but 5.35% AER. Grateful for advice.
Maypole

Your account does not pay 5.22% monthly
What you probaby mean is that the interest rate per month is:-
One twelveth of 5.22% i.e. 0.00435% per month.
Assuming that you took the interest out each month then the total
interest taken out in a year would indeed be 5.22%.

However this ignores the "time value of money".
If you leave the interest in the account each month then the capital goes up each month and the interest goes up each month.

The percentage of interest you get at the end of the year is

100*(((1.00435)^12)-1) which is 5.3467172% approx

The 5.3467172% may be rounded up to 5.35% in advertisements.

So you are NOT losing out.

tom188

So you are NOT losing out.

I think the OP is alluding to earning a lower total income over the year, which they are marginally by having their income paid into their bank account instead of compounding it in the savings account.

Both have the said AER annualised rate, but removing the effects of compounding means that the return on the money will be the Gross rate.

Incidentally i believe the gross rate is calculated from the aer and not the other way round.

tom188

maypole wrote:

Thank you for that Tom. Might have to do something different.

Thanks for all the replies.

maypole.

To be honest your not missing out on a lot 0.12% pa is £1.20 per £thousand per year, had the interest been paid into the account over 12 months instead of away.

maypole

Thanks for the replies, gosh there are some really brainy people on here, I sometimes can't get my head around all these workings out!

Thanks again