Question about monthly interest

angel-delight_5

Hi, I feel a bit silly asking this question. If I open an account and choose monthly interest as opposed to yearly interest, and the aer is the same for both types, what difference does that make to the amount of interest paid over the year?
On yearly interest does the interest earned each month get added to the capital amount and so interest is earned on the capital plus interest for the following month, or have I got it all wrong and the amount of interest is the same whether paid monthly or yearly?

Aegis

The AER takes compounding into effect, so if the AER is the same, no difference should be noted if you leave the money where it is.

nilrem_2

If the AER is the same for monthly as Yearly then you are basically getting the same figure but your receive less because the monthly interest is not able to accrue and hence you get no interest on the earned interest over the year, the AER for monthly is the figure that would be obtained had the interest been added to thye account rather than being paid out!

nilrem_2

I also meant to say that I always specify monthly interest and have it added to my bank account which gives me cash to live on and any surplus can be placed in another interest paying account which goes some way to narrowing the difference between the yearly or monthly rate on the main account.

Mikeyorks

angel-delight wrote: »

or have I got it all wrong and the amount of interest is the same whether paid monthly or yearly?

Depends if you get the interest net of tax .... or gross. If net - you will get marginally less on 'monthly' because you lose the compounding effect of the tax deduction each month?

Aegis

Valid point... how much effect will that have overall do you reckon?

Mikeyorks

nilrem wrote: »

...but your receive less because the monthly interest is not able to accrue and hence you get no interest on the earned interest over the year ..

Sorry - but that's potentially a bit misleading? You're making the strong assumption the monthly interest is paid to an external account. Which is far from universal?

Mikeyorks

Aegis wrote: »

Valid point... how much effect will that have overall do you reckon?

you will get marginally less .....

.....is as good as I get once the solar powered calculator has encountered darkness;)

oldfella

on a £1000 for a year at 6%, I make it you loose around 36p through not receiving interest on the taxed interest.

Aegis

ok, I'll do it

At 5.75% pa gross interest and with a tax rate of 20% of the interest, you will get about £64.11 on £1000 if your interest is paid gross monthly, and you will get £51.00 with interest paid after tax deductions.

To achieve the same AER as 5.75% gross compounded monthly before tax, you'd need a gross annual interest rate of 6.4% according to my figures (which I suspect aren't quite right...), which is 5.12% after tax, or £51.20 interest total. 20 p difference.

I feel somewhat cheated by working that out for the tiny difference that it makes!

Mikeyorks

Aegis wrote: »

I feel somewhat cheated by working that out for the tiny difference that it makes!

As I said ' you will get marginally less'!!;)

....sometimes the sun setting on a solar calculator ... is a good thing.