Teach me how to calculate interest!

12helensp

I'm trying to save up at the moment.......and I want to know how much I would earn on interest.

Do different banks do it differently?? I don't know how it works but do they calcualte interest everday on how much put into the account??

Just to make life easier:
E.g I kept £100 into an account, say Nationwide and the interest is 5.27%, (I don't pay taxes as I do not work) and I get interest twice a year that's in June/ July and end of December.

How much would I have earned as interest for this year??

Thanks for your help!:beer:

tomstickland

Most places advertise a gross rate per year.
Monthly payers pay 1/12th of this per month.
Daily payers pay 1/365th of this per day.
AER includes the effect of compounding on this.

for example, a monthly payer will pay approx 1/12th per month,
so the compounding will give you a bit more.
your monthly multiplier will be
m = 1+1/12* gross_rate/100

raise this to the power 12 to work out total gain over a year
ie:
gain = m^12
this would be a number like 1.05
100*(gain-1) is your AER.

12helensp

:eek: It looks complicated.....I'll have a try!

12helensp

I have just had a go and am confused??
What's the formula if it's daily interest???
Sorry!

studentphil

£1000 x 0.527= answer

then answer divided by 2 for 2 yearly payments.

or answer divided 365 for daily rate.

reehsetin

the way i came to understand it is

reehsetin wrote:

the way i understand it to be from what you said i worked it out as:
5.05% aer so 5.05 divided by 12 = .42% per month
so if i have 1500 in there over 6m
1500 / 100 * .42 * 6m = £37.8 earned.
so your example
1000 / 100 * (5%/12= .41) * 5m = £20.5
maths was never my strong point, try to understand it in my head

reehsetin

your example over 6m i think would be

I kept £100 into an account, say Nationwide and the interest is 5.27%,

5.27 divide by 12 = .43
100 divide by 100 = 1 x .43 = .43
times by 6 to get over 6m = 2.58
i think

tomstickland

E.g I kept £100 into an account, say Nationwide and the interest is 5.27%, (I don't pay taxes as I do not work) and I get interest twice a year that's in June/ July and end of December.

Well it can be complicated.
There's the gross rate in percent.
Interest can be calculated and paid on different time scales.

If you know the AER then that will tell you what a lump sum left in the account for a year will earn.

E.g I kept £100 into an account, say Nationwide and the interest is 5.27%, (I don't pay taxes as I do not work) and I get interest twice a year that's in June/ July and end of December.

I'd expect the total interest to be
((1+5.27/200)^2-1)*100=£5.34, which would suggest a 5.34% AER.