MoneySavingExpert Chair, Martin Lewis · Editor, Marcus Herbert

# Compounded & Simple Interest

6 replies 288 views
Forumite
5 posts
Hi everyone,
HSBC has an Advanced account which gives a customer access to a Regular Saver allowing savings of up to £250 per month for 12 months at 2.75% AER.

On the website, it explains the savings/interest as follows, 'For example, if you saved £250 every month for 12 months a total of £3000 will be paid in to your account during the 12 month term. At 2.75%, you'd earn approximately £44 in interest (gross). This shows you what the gross rate would be if interest were paid and compounded each year. All credit interest will be paid gross. Gross is the rate of interest if interest were paid and not compounded each year.'
I am struggling to understand how this is calculated. Is this Simple Interest and shouldn't it be calculated P/principal amount X r/annual interest rate X n/term of loan in years.
So, £3,000 X 2.75% X 1 = £82.50

If anyone can explain how the £44 in interest is calculated, I will be grateful. Many thanks in advance.

## Replies

• edited 16 September at 10:30AM
Forumite
3.1K posts
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edited 16 September at 10:30AM
Clue: You only have  your first £250 'in' for 12 months, the 2nd £250 is only in for 11 months, 3rd for 10 months etc.
• edited 16 September at 11:01AM
Forumite
6.2K posts
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edited 16 September at 11:01AM
Your first £250 gets 12 months interest, the second 11/12ths etc
250 * 0.0275 * 12/12 = 6.88
250 * 0.0275 * 11/12 =6.30
250 * 0.0275 * 10/12 =5.73
250 * 0.0275 * 9/12 =5.16
250 * 0.0275 * 8/12 =4.58
250 * 0.0275 * 7/12 =4.01
250 * 0.0275 * 6/12 =3.44
250 * 0.0275 * 5/12 =2.86
250 * 0.0275 * 4/12 =2.29
250 * 0.0275 * 3/12 =1.72
250 * 0.0275 * 2/12 =1.15
250 * 0.0275 * 1/12 =0.57
Total = £44.69

Of course this doesn't take into account the exact date of the month you deposit, 29/30/31 days of the month or 13 payments etc but illustrates how it works

For a quick ready reckoner you can use
Monthly deposit * rate * 6.5
250 * 0.0275 * 6.5 = £44.69
• Forumite
32 posts
This isn't simple/compound interest, this is compound interest on an accumulatings monthly level annuity with 1 year duration paid in advance.
Main thing you need to know is that on the money that's in there, you're getting 2.75%.
• Forumite
8.7K posts
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I feel so daft, thank you very much everyone. I really appreciate it. Keep well.
No need to feel daft. You're not the first and won't be the last to ask this.

No bank or building society will pay you interest on money that you haven't yet paid into your account with them. But if you ever find one - please come back & tell us