The Sunday Times Gets It Wrong

Robert_Sterling_3

Beware pitfalls of Monthly Accounts runs the Headline.
By Claire Francis  .... Sunday Times
quoting from Anna Bowers  .... Chase De Vere.
They should know better.

ANNA BOWERS  "Regular accounts are great for people who do not have a lump sum.  But if you have a big deposit you can get a better return from an account that apparently pays a lower rate."

RUBBISH

It goes on.
It explains that if you have £6000 for one year in Alliance & Leicester Easy Access @ 5.35% you will get £321 interest  ( they managed to get that bit right )
But if you invest £500 per month ( £6000 total )  at 7% in a regular saver you will only get £214.89 interest. ( OK).

Now comes the gaffe.

They invite you to deduce from this and I quote

"The rate you earn is in effect 3.58%" from the 7% Account

Are they both thick or are they both thick?

One of them is a Financial Adviser   ...
One of them is writing on finance for a National Newspaper.

They seem to have overlooked the fact that the person with the £6000 on day one can hold the part of the £6000 which is not yet in the regular saver in the Alliance and Leicester Easy Access Account and then transfer £500 per month to the 7% rate.

The overall effect of this off the top of my head would be that on average over the year you would have £3000 at 5.35% and £3000 at 7.0% which give or take a little produces an overall rate of  6.175%.

So the combined efforts of  Claire Francis and Anna Bowes for The Sunday Times and Chase De Vere on a page headlined "Have you really got the best savings deal?" suggest you take an effective rate of  5.35% rather than 6.175%.

ic

This is the problem with a lot of people. They have the mentatility that you can only have one account - if your money is not in an account it must instead be tucked away under a mattress! ::)

smartsaver

It is worrying as they are purporting to be the experts - they have obviously not read Martin's savings fountain....

dunstonh

The worst thing IMO, is that the media is not regulated under the FSA when dealing with financial matters.

Currently the papers can say what they like without having someone authorised by the FSA overlooking it and being responsible for what is being said.

This leads to an often inaccurate and biased article which either gets the wrong end of the stick or only goes part of the way highlighting an issue.

You may recall the days when the papers used to compare the performance of technology funds against corporate bond funds. Look how dangerous that turned out to be. You shouldnt directly compare low risk funds against the highest risk funds in performance league tables.

deemy2004

Yes, they are both thick

Another mistake is to think that the money transit time of 4 days every month as any different than that which occurs with a one off payment investment 4 days transit time.

System

Yes, they are both thick

;D ;D ;D

thor

It's not only that financial advisors are thick but the general public are even thicker. Whenever, you see FAs on TV, they just state the obvious such as 'when looking for saving accounts, use a cash ISA first', and 'always pay off higher interest rate loans before lower interest rate ones', well duhhhh.....surely they can't believe that this 'expert advice' is of any use to someone? Well I think it must be otherwise how could financial advisers(lucky for them) get away with it and make a presumeably comfortable living unless people who don't have a clue pay them.
Even though I don't have any qualifications in financial matters, I have not learned anything from FAs on TV(this could be because they are giving advice for nothing but I doubt it). I am positive that they could not be of any use to me. Whenever I need help I just come to boards like this one and the Motley Fools and it doesn't cost a penny

dunstonh

I often listen to these tv advisors and think the same but you have to remember the scrutiny that they are under when appearing on radio or television.  

Indeed, you have just criticised the website owner as Martin was on talksport yesterday and was very generic and cautious with his reponses in areas where regulated financial services were involved but quite detailed and informative in areas unregulated.

You slip up and give specific advice or recommendation on a regulated financial services product on air and you could be facing a fine or even worse.

Paul_Herring

The actual article: Beware pitfalls of monthly accounts

Another choice quote from it:

For example, suppose you deposit the maximum £500 a month into Abbey’s account. You earn 7% for 12 months on the money you save in month one, 7% for 11 months on the £500 you deposit in the second month and so on. At the end of the year, you will have earned £214.89 in interest, assuming you invest the full £6,000. Bowes said: “The rate you earn is in effect 3.58%.”

If you had a lump sum of £6,000 you could put the money in an easy-access account such as Alliance & Leicester’s online saver. It pays a lower rate of 5.35%, but you would earn £321 in interest over a year.

Lessee now...

From her first calculation

([7%/12 of £500 * 12] + [7%/12 of 500 *11] + ....) =
(12 + 11 + 10... +1) * 7%/12 * £500 =
78 * 7%/12 * 500 = £227.50

Where have I found the extra £21.61?

Rafter

Paul,

You are overstating the calculation slightly because the 7% is an annual equivalent rate probably, which assumed some benefit from compound interest (earning interest on interest).

Doesn't explain it all though. They must have assumed you don't make your £500 payment on the first of the month or something, but I can't get back to their figures.

Daft article though!

Robert_Sterling_3

In a nutshell:-

7% per annum, in a simple case, means put £100 in ... wait a year ... Multiply by 1.07  ...  result  £107  ...  Interest element is 7.

If you instead deal with monthly interest rates ....
Nobody does really because months are of different length  ... then.................

What you have done is to assume the monthly rate is 7% divided by 12  i .e.  0.58333 %...  [ The 3 is repeated for ever and has to be terminated at some point ]

Whereas ... if you use monthly rates ...  which no one does ...  the correct rate would be what you get if you take the twelvth root of the annual rate.

So  Annual Rate   7%   annual  multiplier  1.07

Monthly multiplier 12th root of 1.07

Use the y^x button on calculator

put y as 1.07  and x as ( 1 / 12 )

So monthly multiplier is  1.005654145

Monthly rate is  0.5654145%

BUT

To get a better result you should use a daily rate which is found by extracting the  365th root of the annual multiplier.

[ N B  For most people finding the 365th root of 1.07 is quicker if you do it on a calculator ]  

i.e.  The 365th root of 1.07  is :-

1.000185383  so that the daily interest rate is  0.0185383%.

What about a leap year you ask  ... Leave it out mate.

The principal is changing every day as interest is added to the principal every day.

Here endeth the lesson.
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P.S.  

In your calculation you at some point added together

1 + 2 + 3 + 4 + 5 + 6 + 7 + 8 + 9 + 10 + 11 + 12

the answer was 78

This 78 is the 78 which occurs in the

Consumer Credit Act of 1975
Rule of  78 formula which is used to calculate how much interest should be rebated when a loan is repaid early.

The Rule of 78 is not normally , if ever, applied by Building Societies as far as I know.

Alright wiv you DaveBoy?