HELP:Calculating Interest

sloughflint

euCris wrote: »

Hi,

I am new to this forum and I am really struggling to understand where ColxFile came to the following conclusion.

"For £250 a month, at an annual rate of 10% (Approx 9.57% AER) for 12 months:"

Would anyone be able to explain to me how did he came up with the 9.57% AER please?

Thanks in advance,

Posted this on another thread:

sloughflint wrote: »

Annual AER (a) to monthly gross p.a. would be: 1200*(( 1 +a/100)^(1/12)-1)

If you apply it to an annual rate of 10% you get 1200* (1.1^(1/12)-1)=9.5689%

In other words, if interest was paid monthly @9.57% gross per annum, at the end of the 12 months after compounding, the total interest would be equivalent to another account paying interest once at the end of the year @10%.

bigbloke45

Go to the post "dripfeeding". sloughflint's method is the best I've seen.

sloughflint

bigbloke45 wrote: »

Go to the post "dripfeeding". sloughflint's method is the best I've seen.

Hi Bigbloke 45. If you meant that calculation, I don’t think it would help for this thread. It was an approximation for the drip-feed method.

This thread seemed to contain several interest calculation dilemmas:

• An account that pays interest on a monthly basis ( eg current account, Kaupthing Edge)

• or an account that is fed on a monthly basis and interest paid at the end of a year ( A&L mentioned on the first page)

As long as people know which interest to use, a spreadsheet is probably the most simple way to check interest payments and can allow for interest rate changes.

The interest rate to use is the gross rate quoted which may or may not be the same as AER


Spreadsheet setup
Column A= dates funds start earning interest being careful to add an extra entry at the bottom (the day after interest due to be paid)
Column B = Balance of the account
Column C= formula =(A2-A1)*B1/365 ( in cell C1) and copy down the column
Column D contains the gross rate
Column E = formula = C1*D1 ( in cell E1) and copy down the column
Cell F1……. = SUM (E:E)
Cell G1……= F1*0.8 ( to deduct tax at 20%) . This cell contains the interest that should be paid

Example with the A&L regular saver paying 10% ( post 10)
including multiple deposits during December
01/08/2008 250 23.9726 0.1 £2.40 £160.58 £128.46
05/09/2008 500 35.61644 0.1 £3.56

01/10/2008 750 65.75342 0.1 £6.58

02/11/2008 1000 79.45205 0.1 £7.95

01/12/2008 1050 48.90411 0.1 £4.89

18/12/2008 1250 61.64384 0.1 £6.16

05/01/2009 1500 110.9589 0.1 £11.10

01/02/2009 1750 134.2466 0.1 £13.42

01/03/2009 2000 169.863 0.1 £16.99

01/04/2009 2250 203.4247 0.1 £20.34

04/05/2009 2500 198.6301 0.1 £19.86

02/06/2009 2750 218.4932 0.1 £21.85

01/07/2009 3000 254.7945 0.1 £25.48

01/08/2009






Loobiloo’s KE account (posts 21 and 30)
The AER was 6.5% in March and gross 6.31% which is the rate to be used

01/03/2008 0 0 0.0631 £0.00 £111.68 £89.34
13/03/2008 34000 1769.863 0.0631 £111.68
01/04/2008





Further example with KE account in July and various deposits/withdrawals
Rate change on 29/07/08 to 6.36% gross
Starting balance of £5000, withdrawal of £500 on 15th and deposit of £150 on 21st


01/07/2008 5000 191.7808 0.0631 £12.10 £25.63 £20.50
15/07/2008 4500 73.9726 0.0631 £4.67
21/07/2008 4650 101.9178 0.0631 £6.43
29/07/2008 4650 38.21918 0.0636 £2.43
01/08/2008

LucyTheDwarf

Fantastic, helpful, comprehensive post, sloughflint :T

bigbloke45

I agree with you, sloughflint that your method is an approximation. But is quite a good one and easy to do.

I can understand the various poster's need to get more and more accurate results, but I think this is just because they are scared by maths; if an approximation is 98/99% accurate and it is easy to do e.g. on the train in the morning then I really believe this is a better result for savers than something that needs to be done on a spreadsheet.

Whatever method you use, it will only be an approximation; why beat yourself up by trying to be absolutely accurate?.

I think it's far better for people to understand the idea of approximations and to use methods of calculation they can understand to get there. If they want to invest some time in becoming more maths "literate" then that is great! But, if/when they do, they will see that the idea of approximations turns out to be OK.

Regards.

sloughflint

bigbloke45 wrote: »

I agree with you, sloughflint that your method is an approximation. But is quite a good one and easy to do.

I meant that the calculation was an approximation for the dripfeed method which did not feature in this thread.
Ok then, here's the approximation for a monthly saver paying in 500 per month for a year @10% without drip-feeding.
Interest earnt approx:500*6.5*0.1*0.8=£260 net
For an explanation of the numbers used, see here:

http://forums.moneysavingexpert.com/showpost.html?p=13120787&postcount=13

I disagree with the formulas ( again approximation) on page 1 of this thread but won't go into detail as they have sat there for over a year.

bigbloke45 wrote: »

I really believe this is a better result for savers than something that needs to be done on a spreadsheet.

Whatever method you use, it will only be an approximation; why beat yourself up by trying to be absolutely accurate?.

I would say that the above spreadsheet method should give exact numbers to check against bank interest payments. It is not an approximation since banks calculate the interest daily. Once the spreadsheet is set up, it can be used for all accounts by just pasting in new values in columns A and B.I am comfortable with maths but would still prefer to go to a spreadsheet.

YorkshireBoy

sloughflint wrote: »

I would say that the above spreadsheet method should give exact numbers to check against bank interest payments.

It can never be really "exact" for all accounts, because some providers pay interest from the day after they receive the money.

sloughflint

But that complicates things,YB. Once people understand the concepts, they can adapt their own SS for accounts that might behave differently.
That was just a very basic SS for one interest paying cycle.

liu

With interest rates increasing i want to ask. Is it better to keep your money in an ISA (ie tax free) at 6%. I have a A&L Direct issue 4. Or put it in a normal saving account with a higher interest rate, say AA internet at 7.21 gross AER.

Baldur

Is it better to keep your money in an ISA (ie tax free) at 6%...or put it in a normal saving account with a higher interest rate, say AA internet at 7.21 gross AER.

You would need 7.5% from a taxable account to match 6% tax-free in an ISA (assuming that you are a basic rate taxpayer).