Best thing to do with 3k

Bravepants

mollycat wrote: »

Telling people this is just plain wrong though?

I'm not sure that helps those that are supposedly under any misaprehension.

Anyway, that's my tuppenceworth

Happy Wednesday to you too.

Why is it wrong? My calculations aren't wrong.


Are you saying the very act of letting people know this is wrong?


I have seen people on forums asking this same question, and being surprised by the result.


I don't know if this table will render properly...




Month
Contribution
Annual Interest Rate
Equiv Monthly Rate
Monthly Return

Month 1
Total Contribution = 500
Annual rate = 5%
Annual rate divided by 12 months = 0.004166667
This month's return = £2.08


Similarly for the other 11 months...


Month 2
1000
5%
0.004166667
£4.17


Month 3
1500
5%
0.004166667
£6.25


Month 4
2000
0.004166667
£8.33


Month 5
2500
0.004166667
£10.42


Month 6
3000
0.004166667
£12.50


Month 7
3500
0.004166667
£14.58


Month 8
4000
0.004166667
£16.67


Month 9
45000
0.004166667
£18.75


Month 10
5000
0.004166667
£20.83


Month 11
5500
0.004166667
£22.92


Month 12
6000
0.004166667
£25.00

Total Return = £162.50

Total 12 month Return as % = 2.7% = 100*(162.50/6000)

So 2.70%, not my initial approximation of 2.5%.



I was going to adjust for monthly compounding of the interest, but I re-read the description of the account and they don't do monthly compounding!


So if I have £6k to invest and I have to drip feed it in monthly at £500, the interest is calculated daily and totalled up at the end, but not compounded each month!


They offer 5% AER, BUT they limit the amount of cash you get back by making you drip feed monthly. They illustrate an example showing a 2.7% annual return the same example I have used above.


So are they morally wrong for doing that, or am I morally wrong for pointing it out?

Happy Wednesday but looking forward to an even happier Friday.

P

ColdIron

As you have spotted this is an old saw 'round these parts and has indeed been discussed vigorously

Bravepants wrote: »

so the actual annual interest rate you get on these regular savers is more like half the advertised rate

This is the bit that is a red rag to a bull, the actual annual interest rate is exactly what is advertised

So expect approx 2.5% actual return from this account after the year is up

This is closer to the truth but rather than halving the rate I think it is better expressed by saying your return is the advertised rate times the average annual balance

If you want a quick ready reckoner this will be pretty close

Monthly contribution * advertised rate * 6.5

Bravepants

ColdIron wrote: »

As you have spotted this is an old saw 'round these parts and has indeed been discussed vigorously
This is the bit that is a red rag to a bull, the actual annual interest rate is exactly what is advertised

This is closer to the truth but rather than halving the rate I think it is better expressed by saying your return is the advertised rate times the average annual balance

If you want a quick ready reckoner this will be pretty close

Monthly contribution * advertised rate * 6.5

Yes, I have a large collection of red rags! Hehe!


As an investor I'm interested in my return from the complete investment strategy (interest rate and contribution rate).


My use of the phrase "annual interest rate" was perhaps misleading; I should have used "annual return" to be more consistent with my argument.


Anyway, I'm off to put this red rag in the washing machine, and go get a couple more off the clothes line before it rains! :-)


P

ColdIron

Bravepants wrote: »

As an investor I'm interested in my return from the complete investment strategy (interest rate and contribution rate).

Probably worth pointing out then that your total return from the complete investment strategy could be even higher if you are funding it with money already earning interest elsewhere. Try the 'drip feed' tab

http://www.moneysavingexpert.com/savings/best-regular-savings-accounts#calculator

Good luck with the washing and don't let your colours run

Bravepants

ColdIron wrote: »

Probably worth pointing out then that your total return from the complete investment strategy could be even higher if you are funding it with money already earning interest elsewhere. Try the 'drip feed' tab

http://www.moneysavingexpert.com/savings/best-regular-savings-accounts#calculator

Good luck with the washing and don't let your colours run

Thank you. I don't bother with regular savers, mostly for the reasons we discussed here. They are suitable for some people who have a small amount of cash they are going to use in a year or so, and they want somewhere safe to put it.


But I don't want to faff about feeding in chunks of my savings into different accounts in an attempt to scramble around looking for the best interest rates.


It also irks me that banks advertise seemingly high interest rates, but then apply conditions (contribution rate, and duration of account) such that they end up actually paying out less than at first seems. It is, after all, advertising just to get your money. Sorry, but that's just how I feel.


Personally I keep a small emergency fund in a Santander 123 account, it doesn't offer great interest no but I also drip feed into a S&S ISA, and I contribute to my AVCs monthly to save 40% tax. I would rather not have the Regular Saver account faff.

ColdIron

Bravepants wrote: »

But I don't want to faff about feeding in chunks of my savings into different accounts in an attempt to scramble around looking for the best interest rates.

Once you set the standing orders up they run themselves. This is MSE and many people 'round these parts positively delight in wringing every pound out of their cash that they can. I've received £1,291.07 in interest from them since the beginning of this tax year and I consider myself a sluggard compared to some

bigadaj

Bravepants wrote: »

Thank you. I don't bother with regular savers, mostly for the reasons we discussed here. They are suitable for some people who have a small amount of cash they are going to use in a year or so, and they want somewhere safe to put it.


But I don't want to faff about feeding in chunks of my savings into different accounts in an attempt to scramble around looking for the best interest rates.


It also irks me that banks advertise seemingly high interest rates, but then apply conditions (contribution rate, and duration of account) such that they end up actually paying out less than at first seems. It is, after all, advertising just to get your money. Sorry, but that's just how I feel.


Personally I keep a small emergency fund in a Santander 123 account, it doesn't offer great interest no but I also drip feed into a S&S ISA, and I contribute to my AVCs monthly to save 40% tax. I would rather not have the Regular Saver account faff.

That's your choice but best not to mislead others.

It's a good idea to save higher rate tax into a pension but are your sure avcs are your best option, assuming this is a db pension that can they be used as part of the tfls and they will presumably only be available at scheme vesting age, a personal pension or sipp may well be more flexible. Off topic, but you started it.....

jimjames

Bravepants wrote: »

It also irks me that banks advertise seemingly high interest rates, but then apply conditions (contribution rate, and duration of account) such that they end up actually paying out less than at first seems. It is, after all, advertising just to get your money. Sorry, but that's just how I feel.

It might be how you feel but unless you have evidence to prove it then it is just that - a feeling and not actually truth.
It is plain wrong to say that an interest rate is "seemingly high" and then suggest it is not paid. Banks have to comply with ASA and I'm not aware of any that advertise a rate that they do not pay.
Yes there might be conditions but they're generally pretty easy to meet and you get exactly the return they promise. Suggesting otherwise is just untrue.

Bravepants

From our very own website...


http://www.moneysavingexpert.com/savings/best-regular-savings-accounts


I don't see how this is any different to what I said!



"How can they pay such huge interest rates?

Often these accounts only last a year, and there are strict limits on the amount you can save. Banks commonly use them as advertising tools, promising eye-catching interest rates, in order to grab your custom - many of them are linked accounts, meaning to get them, you need to have the bank's current account too.
Once it ends, your cash usually sweeps into a bog standard account. Note the date, then ditch 'n' switch to a better deal.
How does the interest work?

All interest from regular savings accounts will now be paid to you tax free, on account of the personal saving allowance. Basic-rate taxpayers can earn £1,000 tax-free and higher-rate taxpayers £500. Additional rate taxpayers get no allowance.
The Government estimates this will take 95% of people out of paying tax altogether - but if you will exceed your allowance, HMRC will take any interest owed through your tax code if you're employed, or through self-assessment if you do that.
One point to note on regular savings is that the interest received will be around half the interest rate of the account as the money is being saved monthly rather than in one lump sum. To maximise your overall interest, use the dripfeeding technique below..."

Bravepants

bigadaj wrote: »

It's a good idea to save higher rate tax into a pension but are your sure avcs are your best option, assuming this is a db pension that can they be used as part of the tfls and they will presumably only be available at scheme vesting age, a personal pension or sipp may well be more flexible. Off topic, but you started it.....

Thank you.


They are considered as a separate DC pension. I can take them from 55, with 25% tax free lump sum. They are also subject to the new pension freedoms so I can drawdown or transfer.