Regular Saver - Equivalent interest rate by month drops?

w.h.i.p.p.e.t

Hi.

First post! Apologies if the mathematics/theory behind what I’m about to query has already been answered. I searched but could not find that it had specifically.

Short question – Is it worth filling a 5% regular saver past 6 months when I have another account that earns 3%.

Explanation:

I've been looking into savings account options and have opened a new regular saver account. The new account is a 12 month account and pays 5%. I will drip feed this in the usual way.

Because the new account overlaps the end of an existing regular saver, I won’t be able to deposit the full amount from income. So I plan to use income, topped up with money from a savings pot that is currently earning 3%. I should be able to fulfill the max deposit amount each month, without exhausting the savings pot, for the first 6 months. I will then start to fill the 3% pot back up, dropping the regular saver deposits to the minimum amount. Finally I will ‘up’ the regular saver deposits once/if the 3% pot becomes full (the interest earning balance is capped).

I realise that the effective rate of the regular saver is around half, 2.5% overall, compared to the 3% account I will partially feed from. My reasoning is that because regular savers are drip fed, effectively the interest rate - per deposit - ?decreases? over the term.

I calculated that up until midway between the 5th & 6th deposits I’ll ‘effectively’ be earning more than 3% on each deposit. After this I will be earning less than 3%.

Month 1 deposit earns = 12/12 x 5% = 5%
Month 2 deposit earns = 11/12 x 5% = 4.6%
.
.
Month 5 deposit earns 8/12 x 5% = 3.3%
Month 6 deposit earns 7/12 x 5% = 2.9%

Is my reasoning sound? Or do I have the mathematics on their head? Or even worse totally wrong

Assuming that the above is sound and taking it a step further. I should probably open another regular saver at 5% for 6 months, rather than top the 3% pot back up and so on and so forth :T

Thank you.

Tom99

No your reasoning is not sound.
You have two accounts, one pays 5%pa and the other 3%pa so put as much as you can in the one paying 5%pa. It does not matter if this is month 1 or month 11.

If you put money into the 5% account at the end of month 6 then by the end of month 12 you will have earned 5%*6/12=2.5%.
If you put the same money in the account earning 3% then you will earn 3%*6/12=1.5%

gingercordial

w.h.i.p.p.e.t wrote: »

Hi.

First post! Apologies if the mathematics/theory behind what I’m about to query has already been answered. I searched but could not find that it had specifically.

Short question – Is it worth filling a 5% regular saver past 6 months when I have another account that earns 3%.

Explanation:

I've been looking into savings account options and have opened a new regular saver account. The new account is a 12 month account and pays 5%. I will drip feed this in the usual way.

Because the new account overlaps the end of an existing regular saver, I won’t be able to deposit the full amount from income. So I plan to use income, topped up with money from a savings pot that is currently earning 3%. I should be able to fulfill the max deposit amount each month, without exhausting the savings pot, for the first 6 months. I will then start to fill the 3% pot back up, dropping the regular saver deposits to the minimum amount. Finally I will ‘up’ the regular saver deposits once/if the 3% pot becomes full (the interest earning balance is capped).

I realise that the effective rate of the regular saver is around half, 2.5% overall, compared to the 3% account I will partially feed from. My reasoning is that because regular savers are drip fed, effectively the interest rate - per deposit - ?decreases? over the term.

I calculated that up until midway between the 5th & 6th deposits I’ll ‘effectively’ be earning more than 3% on each deposit. After this I will be earning less than 3%.

Month 1 deposit earns = 12/12 x 5% = 5%
Month 2 deposit earns = 11/12 x 5% = 4.6%
.
.
Month 5 deposit earns 8/12 x 5% = 3.3%
Month 6 deposit earns 7/12 x 5% = 2.9%

Is my reasoning sound? Or do I have the mathematics on their head? Or even worse totally wrong

Assuming that the above is sound and taking it a step further. I should probably open another regular saver at 5% for 6 months, rather than top the 3% pot back up and so on and so forth :T

Thank you.

Your reasoning is wrong.

Let's say you open your RS on 1 January. Yes, deposit 1 earns 5% for a whole year.

For deposit 12 on 1 December, yes that only earns 5% for one month, but nevertheless for the month of December it is earning 5% in that RS account. The alternative is that you leave it in the 3% account, in which case that money is only earning 3% for the month of December. You could have had it earning 5% instead.

You have to compare where it could be during that month for it to be apples and apples.

System

A little knowledge is a dangerous thing!

w.h.i.p.p.e.t

Thanks for your replies Tom99 & gingercordial.

Really the original question was - Should I use the 3% savings to partly fund the regular saver which effectively only earns 2.5% over the term. But I guess that 2.5% is on the full balance over that term.

I can see it does initially, because any initial amount I move will sit for the next 12 months earning the full 5% over the term. Easy. So far so good.

But then looking at the overall equivalent (2.5%) had me thinking that there must be a point where the gain tails off.

Looking at this with fresh enlightenment, I can see that any amount earning 5% is more than 3% however long it earns it for. Is this how I should be looking at it?

polymaff

This concept has been laid out so often on MSE.


The true rate of a 5% regular really is 5% - but only on what is in there.


Folk fund regular savers in two ways.


1. They fund it from regular income. The old name for these accounts was SAYE accounts - Save As You Earn accounts - funded this way you definitely get your 5%


2. They fund from existing deposits elswhere. Not so good. You end up with the mean of the two rates.

Tom99

w.h.i.p.p.e.t wrote: »

But then looking at the overall equivalent (2.5%) had me thinking that there must be a point where the gain tails off.

It does not tail off, you get the same 5%pa throughout the 12m period. Obviously if you only have the money in the account for less than 12mths you are not going to get 5%, but a proportion of 5%.
Exactly the same applies to your other account paying 3%pa.

colsten

w.h.i.p.p.e.t wrote: »

But then looking at the overall equivalent (2.5%) had me thinking that there must be a point where the gain tails off.

There is, categorically, no such thing as an overall equivalent interest rate for Regular Saver accounts.

The interest you can get in various accounts is expressed as the Annual Equivalent Rate (AER) %age. AER is AER, regardless of the type of the account. A higher AER %age yields higher interest than a lower AER.

Feeding a 5% AER Regular Saver account from an account that pays, for example, 3% AER is a good technique, known as dripfeeding. Have you read the MSE Regular Savings article?

w.h.i.p.p.e.t

polymaff wrote: »

This concept has been laid out so often on MSE.


The true rate of a 5% regular really is 5% - but only on what is in there.


Folk fund regular savers in two ways.


1. They fund it from regular income. The old name for these accounts was SAYE accounts - Save As You Earn accounts - funded this way you definitely get your 5%


2. They fund from existing deposits elswhere. Not so good. You end up with the mean of the two rates.

Apologies again. Maybe it was the way I was searching. I've only just looked at funding from savings. I've always used income until now. So it's new for me.

I just ran through the figures month by month decreasing one pot whilst increasing the other, fully emptying one and filling the other. I can see that I do get roughly the average of the two rates. Thanks. One to remember.

Interestingly, I then ran through my original suggestion using the same method and over 12 months actually calculated more overall interest from both accounts by dropping the 3% pot halfway whilst filling the regular for the first 6 months then re-filling the 3% pot for the second 6 months and leaving the regular the same.

w.h.i.p.p.e.t

colsten wrote: »

There is, categorically, no such thing as an overall equivalent interest rate for Regular Saver accounts.

The interest you can get in various accounts is expressed as the Annual Equivalent Rate (AER) %age. AER is AER, regardless of the type of the account. A higher AER %age yields higher interest than a lower AER.

Feeding a 5% AER Regular Saver account from an account that pays, for example, 3% AER is a good technique, known as dripfeeding. Have you read the <best-regular-savings-accounts/"]MSE Regular Savings article>?

I have. I must have misunderstood some things.

colsten

w.h.i.p.p.e.t wrote: »

Apologies again. Maybe it was the way I was searching. I've only just looked at funding from savings. I've always used income until now. So it's new for me.

I just ran through the figures month by month decreasing one pot whilst increasing the other, fully emptying one and filling the other. I can see that I do get roughly the average of the two rates. Thanks. One to remember.

Interestingly, I then ran through my original suggestion using the same method and over 12 months actually calculated more overall interest from both accounts by dropping the 3% pot halfway whilst filling the regular for the first 6 months then re-filling the 3% pot for the second 6 months and leaving the regular the same.

I reckon your calculations have a serious flaw. Interest is calculated daily, based on the balance at the end of the day, and on the AER % / 365.

Whilst it is possible to create your own spreadsheet to do the calculations, it's much easier to simply use the MSE RS calculator, which you can find via the link I posted earlier.