7.0% actually 3.69%?

anakeimai

Love the advice on here, but can you clarify some maths please?  Currently FirstDirect offer a 7.0% rate on a Regular Savings Account.  By my maths, if I paid in £300.00/month for 12 months that would give me a return of £ 252.00.  Happy Days?!  No:

If you save £300 every month for 12 months and qualify for the 7.00% AER/Gross p.a. interest rate, you'll earn approximately £136.50 interest (gross). Interest is calculated daily and paid 12 months after you opened the account.

Can anyone explain this to a normal, non-accounts expert, please?  This seems designed to deceive to me 😔

km1500

you only get your interest on the money you have saved

so obviously in the first month you would only have saved 300 and you will get interest on 300 and not on 3600

 in month two you will have saved 600 and you will get interest on 600

and so on

jimexbox

You don't have £3600 in the account for the full year. You're earning 7% on the amount you have in the account. 

Johnjdc

What needs explaining?

You are calculating based on 7% of £3600, but you aren't saving £3,600 for a year, because you are paying it in gradually

No bank will pay you 12 months' interest for money you only save with them for one month. Why would they?

MorningcoffeeIV

It's not designed to deceive. It's just maths. 

You only earn interest on the money in your account. By your maths, you're assuming that the full £3,600 is in your account. It's not, as you're paying it in each month.

Roughly speaking, your average balance for 12 months is £1,800,as it goes from zero to £3,600.

Happy days indeed. It's a good rate.

ForumUser7

Your calculation appears to be (300x12) x 0.07. That would give you the interest for if you deposited £3,600 in the 7% account straight away at the start of the 12 months in one go - which is not permitted.

Rather you can deposit £300 each month for 12 months.

You will not get interest for the days funds are not in your account, hopefully that makes sense.

This calculator may help you to visualise it - https://www.thecalculatorsite.com/finance/calculators/compoundinterestcalculator.php

Doctor_Who

Your calculation assumes the whole £3600 is saved in month 1, but you actually only have £300 saved for 12 months, then £600 saved for 11 months, £900 saved for 10 months etc etc. The actual amount of interest paid is ~50% of £3600 @ 7%.

TadleyBaggie

Seems right, you can’t expect to 7% of the final amount in the account.  So it will be roughly 7% of the average amount over the year, half the final amount. Pretty sure all regular savings accounts work this way. 

MrsPound

It’s not designed to deceive. If you pay in £300 a month, only the first £300 will earn a years worth of interest at 7%. The second £300 you pay into the account in month 2, will earn 7% interest for 11 months, and so on. The calculation you did assumes all the payments, 12x £300, are in the account for a full 12 months.

anakeimai

Thanks all, but I'm still baffled.  In one month I'll have paid in £300.00 so why at 7% doesn't that give me £21?

ColdIron

7.0% actually 3.69%?

No, actually 7.00% but only for the money in the account. No one will pay interest on money that's not (and may never be) in the account