Failing to understand appeal of regular savers

mgdavid

Kumquats wrote: »

.........
Anyway, my problem with this is that I don't think it's a consistent way to think about interest. ........

Tough, because that is how it works. It's been explained 3 times in great detail by others, you need to realise that no matter how much you protest, it isn't going to change, because it's correct.
That is how it works.

Kumquats

mgdavid wrote: »

Tough, because that is how it works. It's been explained 3 times in great detail by others, you need to realise that no matter how much you protest, it isn't going to change, because it's correct.
That is how it works.

Whoa, easy. I agree that's how it works (sorry for not saying this explicitly, but the linear calculation matches the figures, so that's most probably how it works in real life).

I still think it's really unnatural thing to do, and that people are making a false distinction between interest being paid monthly or yearly - see my example for why this distinction is false. I guess it's done this way because calculating 365th roots is way more computationally expensive than dividing by 365. But I think it is artificial that the interest is calculated in that way - interest is always a multiplication, not an addition. In abstract. I am discussing this because I find it interesting - I'm now convinced (thank you, patient repliers) that linearly is indeed how it works in practice.

Kumquats

Ballard wrote: »

It is not possible to add the funds or interest from a maturing regular saver into a new one so I'm not sure what you're getting at (or indeed, why).

Let's go through this again...

All regular savers that are currently on the market have a maximum amount that you can pay in each month. You can't add interest paid from elsewhere.

Interest is not paid monthly. It accrues daily and is paid annually.

Bearing in mind these two factors either I don't understand what you're asking or it's not possible. My money is on the latter.

LXDaddy (the previous poster) explains explicitly how this might work (theoretically - this is a thought experiment, after all), since you apparently lack the imagination to think it through yourself.

mgdavid

Kumquats wrote: »

Whoa, easy. I agree that's how it works (sorry for not saying this explicitly, but the linear calculation matches the figures, so that's most probably how it works in real life).

I still think it's really unnatural thing to do, .........

As you appear to be in a minority of 1 maybe you could consider the proposition that it's you that is unnatural and strange...

When dealing with money I find it preferable to live in the real world, it comes up with the right answer always.
Why the thought experiment, is it a hobby of yours?

Kumquats

mgdavid wrote: »

As you appear to be in a minority of 1 maybe you could consider the proposition that it's you that is unnatural and strange...

When dealing with money I find it preferable to live in the real world, it comes up with the right answer always.
Why the thought experiment, is it a hobby of yours?

Thinking is good for you.

Eco_Miser

Kumquats wrote: »

I still think it's really unnatural thing to do, and that people are making a false distinction between interest being paid monthly or yearly - see my example for why this distinction is false.

Compound interest is only a concept. No bank actually pays compound interest, they pay simple (linear) interest for a period (month,quarter, year) then add the accrued interest to the existing balance, and calculate the interest for the next period. If there are no other payments in or out of the account, then the interest is the same as that calculated by the compound interest formula - because the compound interest formula was derived from the simple interest formula by repeatedly applying the simple interest formula.

mapk

Interesting 'thought experiment'. True compound interest is fractal: how's that for a concept

Ballard

Kumquats wrote: »

LXDaddy (the previous poster) explains explicitly how this might work (theoretically - this is a thought experiment, after all), since you apparently lack the imagination to think it through yourself.

It's not that I don't have the imagination to calculate a theoretical interest rate. It's that I have better things to do with my time than to work out a rate that has no bearing in real life. Had you made it clear that this was merely an experiment on your part I wouldn't have replied in the first place.

All's well that ends well, though. You now know how interest on such accounts is calculated.

Kumquats

mapk wrote: »

Interesting 'thought experiment'. True compound interest is fractal: how's that for a concept

I don't think it's really fractal, per se. I guess there is some self similarity because the derivative is proportional to the function? Erm, I'm not sure... I don't think that counts as fractal.

So if X is how much money you stick in at time t=0 (time measured in years), at annual interest alpha (in our case = 1.06), then at time t your original X is now worth
X * alpha^t.

For the total, you'd just sum up over the different X and different t.

Now I am confused about why banks don't do this, because that seems pretty inexpensive to calculate (but I don't actually know how long it takes to calculate e^x to decent precision, i.e. how fast does the Taylor expansion converge)

Kumquats

Eco_Miser wrote: »

Compound interest is only a concept. No bank actually pays compound interest, they pay simple (linear) interest for a period (month,quarter, year) then add the accrued interest to the existing balance, and calculate the interest for the next period. If there are no other payments in or out of the account, then the interest is the same as that calculated by the compound interest formula - because the compound interest formula was derived from the simple interest formula by repeatedly applying the simple interest formula.

Money is just a concept. Number is just an abstraction.