Compound Interest on Reg Saver

lindabea

According to the First Direct Reg Saver T&C, if you save £300 per month for 12 months, the total int will be £136.50.  However, I put these figures into the FV calc in a spreadsheet (ie £300 at 0.58333% rate for 12 periods), and I get a total int of £117.77.  Probably doing something wrong in my calc, but I tried several other ways and not able to get anywhere near 136.50.  If I apply the int at the start of the period, the amount is greater.  Can someone please help me out with this.      

masonic

Interest is credited annually (at maturity), not monthly, so there is no compound interest.

lindabea

masonic said:

Interest is credited annually (at maturity), not monthly, so there is no compound interest.

Interest is indeed credited annually, but must be calculated on the daily balance.  And if there is no compounding, it would make the total interest a lot less than £136.50 

ordnancesurvey84

As a rule of thumb for regular savings accounts that run for 12 months, the average balance can be approximated to 6.5 x monthly deposit amount.
So in the case of this account the average balance is roughly 6.5 x £300 = £1950
Use this figure to estimate annual interest: £1950 x 7% = £136.50

surreysaver

What's a FV calc?

When my First Direct Regular Saver matured in December I got £135.95 in interest.

Where's the compounding coming from if it only pays interest once?

george4064

@lindabea you should plug the figures into the calculator here: https://www.moneysavingexpert.com/savings/regular-savings-calculator/

A 7% regular saver paying in £300 a month will earn about £135 interest over a 12 month period.

lindabea

OK. I worked out how FD worked out the interest as 136.50.  I put 300 600 900...right up to 3600 in a spreadsheet column, and against each row I calculated the interest at the end of each month using the balance at that month.  The total of all int amount comes to exactly 136.50. 

eskbanker

It's easily verified with a very simple spreadsheet:

£300	0.005833	£1.75
£600	0.005833	£3.50
£900	0.005833	£5.25
£1,200	0.005833	£7.00
£1,500	0.005833	£8.75
£1,800	0.005833	£10.50
£2,100	0.005833	£12.25
£2,400	0.005833	£14.00
£2,700	0.005833	£15.75
£3,000	0.005833	£17.50
£3,300	0.005833	£19.25
£3,600	0.005833	£21.00
		£136.50

Edit: OP did the same at the same time!

lindabea

surreysaver said:

What's a FV calc?

When my First Direct Regular Saver matured in December I got £135.95 in interest.

Where's the compounding coming from if it only pays interest once?

FV is a formula used in a spreadsheet to calculate the future value based on an amount paid over a period of time.

Looks like there is no compounding, interest is based on the balance at the end of each month

As a matter of interest, do you have any idea why you did not receive the full 136.50.  I'm assuming of course, that you paid 300 in every month.    

grumpy_codger

surreysaver said:

What's a FV calc?

Future Value
https://en.wikipedia.org/wiki/Future_value

lindabea said:

According to the First Direct Reg Saver T&C, if you save £300 per month for 12 months, the total int will be £136.50.  However, I put these figures into the FV calc in a spreadsheet (ie £300 at 0.58333% rate for 12 periods), and I get a total int of £117.77.  Probably doing something wrong in my calc, but I tried several other ways and not able to get anywhere near 136.50.  If I apply the int at the start of the period, the amount is greater.  Can someone please help me out with this.      

 In fact,  FV(0.07/12, 12,-300,0,1) = £3,739.46, i.e. the interest is £139.46.
It's bigger than £136.50 because 7% is "AER/Gross p.a." - it already includes compounding and you cannot simply divide it by 12 to calculate the simple monthly rate.

Your £117 is when deposits are made at the end of each month, not at the start.

ZeroSum

lindabea said:

surreysaver said:

What's a FV calc?

When my First Direct Regular Saver matured in December I got £135.95 in interest.

Where's the compounding coming from if it only pays interest once?

FV is a formula used in a spreadsheet to calculate the future value based on an amount paid over a period of time.

Looks like there is no compounding, interest is based on the balance at the end of each month

As a matter of interest, do you have any idea why you did not receive the full 136.50.  I'm assuming of course, that you paid 300 in every month.    

It'll have been due to account not getting funded on exact same day, mainly due to weekends since FD are awkward & don't let you manually top up like other banks