Monthly or Yearly interest?

belisama

Hi helpful people!

I'm about to open a couple of saving accounts and during my research (okay - mostly reading this site!) it seems that some offer the choice of monthly or yearly interest.

Am right in thinking that:

• for regular, long-term, not-touching-it savings it's better to have yearly interest
• for regular, long term, will-definitely-dip-in-and-out-over-the-year savings it's better to have monthly interest

I'm assuming that the second set of savings will fluctuate over the year, and may not be at it's best at the end of the year, but in some months will be quite high. The first set of savings will grow steadily during the year.

Hope this makes sense - thanks in advance for your help.

pressuredrop_2

It makes no difference as interest is accrued daily and the AER is identical.

rb10

Nope - there is rarely any benefit of one over the other.

Just go with the account that gives the highest AER.

(The only time when monthly or annual can be better than the other is if you are/anticipate being close to an income tax threshold either this year or next - you may wish to move some of next year's income into this year [i.e. have monthly interest] or delay it so that you get the whole lot in the next tax year [i.e. have annual interest].)

belisama

Oh

Well, colour me stupid! Why on earth do they offer a choice, then?


Thanks

Edit - just saw rb10's answer - thanks

pressuredrop_2

Some people may want a monthly income.

belisama

D'oh.

I'm sorry I started this now - it's just showing up all my shortcomings

crimsonfin

all other things being equal i guess you could argue that inflation might factor into which is best for you.

personally i always opt for monthly

rb10

crimsonfin wrote: »

all other things being equal i guess you could argue that inflation might factor into which is best for you.

No, inflation makes no difference to which is best. They are both equal.

crimsonfin wrote: »

personally i always opt for monthly

I guess that's because you like to see the interest building up each month? ... because after a year, you'll be in exactly the same position as if you opted for annual interest.

opinions4u

Although if the gross annual rate is 3.50% that would often create a monthly gross rate of 3.45% pa which would leave you with different AERs for annual and monthly interest.

AER 3.50% annual. 3.51% monthly.

The AER for monthly is only achieved if interest is reinvested at the same rate. If you withdraw the interest and put it in to a lower paying account, or spend it, you will actually be earning less (because the gross rate is usually less for monthly).

Stompa

If you pay tax then, all other things being equal, annual interest is marginally better than monthly. This is because with annual interest the money you pay in tax remains in the account for the full year (so is itself earning interest throughout), with monthly interest the tax gets paid out monthly (at which point it ceases to earn interest).

The difference between the two is tiny though!