How to calculate interest on savings?

jamtart6

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If you've arrived from Google, our fully researched ISA's guide, which includes the ISA Savings Calculator may be helpful.

Back to the original post...

I have a maths GCSE and can't work out how to do this I'd like to know for example:

I have £1000, the interest is 5.75% AER (whatever that means) - how much will I have in 12 months time??

Also - why do monthly interest payments in ISAs change? is it to do with the bank of englands interest rates??

Why don't we learn useful stuff like this at school?!? I'd be so grateful if someone could explain it to me??

Aegis

It's part of either GCSE or A-level syllabus, depending on which board you do. What you're looking for is a geometric series. In this case what you need to do is divide the interest rate by 100, add 1, multiply it by your capital, then account for taxation.

i.e. £1000 x 1.0575 = £1057.50 gross

Multiply by 0.8 for basic tax rate, by 0.9 for lower tax rate and by 0.6 for higher tax rate and you get the answer to your question.

Remember that 20% tax is deducted at source unless you fill out a form specifically to get your interest paid gross.

YorkshireBoy

jamtart6 wrote: »

Also - why do monthly interest payments in ISAs change? is it to do with the bank of englands interest rates??

No. It can be for several reasons, including...

1. The number of days in the month.

2. The balance changes, either through additional deposits, or the addition of the previous months interest.

Your interest is calculated daily on...

closing balance x gross p.a. rate / 365 x number of days in month

...and then accrues in the background before being paid once per month.

KiKi

jamtart6 wrote: »

I have £1000, the interest is 5.75% AER (whatever that means) - how much will I have in 12 months time??

Also - why do monthly interest payments in ISAs change? is it to do with the bank of englands interest rates??

Why don't we learn useful stuff like this at school?!? I'd be so grateful if someone could explain it to me??

AER = Annual Equivalent Rate. Ie, the percentage of interest you will receive on your savings each year (in simple terms). As Aegis explained, if you have £1000 in an account ALL year at a rate of 5.75%, you will get £57.50. But then you're taxed on it, so take that into account, too.

Interest payments generally change in ALL accounts, not just ISAs, as the BoE rate goes up and down - *unless* you have a fixed rate of interest. I have a fixed rate ISA, so the interest change won't affect that. But I have a variable rate in my savings account so the rate went down in December, dammit! But your ISA monthly interest payments may also change if you put more money in / take it out, and also depends on the number of days in a month which is how the interest is calculated.

I certainly didn't learnt this stuff at school...not in any meaningful, apply-it-to-your-life way. I learnt on this site!

This is Martin's excellent guide on interest rates; have a read: http://www.moneysavingexpert.com/banking/interest-rates

Hope that helps you.
KiKi

jamtart6

aha! thanks gang! The AER is a good measure then, so I'd then take £1057.50 and multiply that by 5.75 to get the next years interest

[Deleted User]

I'm pretty sure cumulative interest is part of the GCSE sylabus

YorkshireBoy

jamtart6 wrote: »

aha! thanks gang! The AER is a good measure then, so I'd then take £1057.50 and multiply that by 5.75 to get the next years interest

No. You'd multiply by 1.0575...but only if the rate hasn't changed.

jamtart6

YorkshireBoy wrote: »

No. You'd multiply by 1.0575...but only if the rate hasn't changed.

sorry yes thats what I meant, I just typed it all wrong

jamtart6

ringo_24601 wrote: »

I'm pretty sure cumulative interest is part of the GCSE sylabus

OK OK, it was just so long since GCSE i'd forgotten

chappers

I think it;s back to school for you:D

Mikeyorks

jamtart6 wrote: »

so I'd then take £1057.50 and multiply that by 5.75 to get the next years interest

...... if you open a Bank ..... can I have an account with you, please?:p