paid monthly or yearly?

magicnumbers

If you are given the option of having any interest paid on your savings Monthly or Yearly which is the best option?

My thinking is although the interest rate is slighly lower on the monthly you will gain interest on the interest monthly rather than wait a whole year for your interest to be paid THEN can paid interest on your interest.

Am I missing something?

debbie42

If you compare the AER on a bank's similar monthly and annual interest paying savings accounts, you'll normally find they equate to the same thing, as you suggest.

Sometimes, it can be beneficial for tax purposes to have interest at a certain time, but ordinarily it doesn't make much difference.

LucyTheDwarf

The difference is literally pennies, across the year... the yearly rate is as if it was paid monthly and compounded. You get a slight rounding difference, really.

I prefer to have the interest monthly. Psychologically, it feels good to see my account growing, and I stay motivated to keep adding to it too.

Apreciar

Allthough the AER is the same for monthly and yearly, there is a small difference in favour of yearly because tax is deducted at time of payment of interest and so you have a smaller amount compounding each month. The difference though is so small on all but very large amounts it is not worth worrying about.

Pendle_Gazza

LucyTheDwarf wrote: »

I prefer to have the interest monthly. Psychologically, it feels good to see my account growing, and I stay motivated to keep adding to it too.

I agree wholeheartedly - it definitely makes you feel better seeing your balance grow on a more regular basis. I've always chosen to only take accounts offering monthly interest.

free4440273

the obvious point also: if u require an 'income' of sorts, then monthly is a decent option:)

[Deleted User]

Discussed here:

http://forums.moneysavingexpert.com/showthread.html?t=647
http://forums.moneysavingexpert.com/showthread.html?t=26620
http://forums.moneysavingexpert.com/showthread.html?t=3793
http://forums.moneysavingexpert.com/showthread.html?t=40516

LongTermLurker

LucyTheDwarf wrote: »

I prefer to have the interest monthly. Psychologically, it feels good to see my account growing, and I stay motivated to keep adding to it too.

The other advantage to monthly interest is that IF the bank were to go under, you would have already received some interest. I don't know whether you would get owed interest otherwise, so it feels safer.

LucyTheDwarf

LongTermLurker wrote: »

The other advantage to monthly interest is that IF the bank were to go under, you would have already received some interest. I don't know whether you would get owed interest otherwise, so it feels safer.

Hmm, that brings up an interesting question. I'm sort of thinking of the £35,000 "safe" limit, and any interest bringing it over that. You could easily squirrel it away to another account every time interest took an account over 35k, were it paid monthly..

LongTermLurker

LucyTheDwarf wrote: »

Hmm, that brings up an interesting question. I'm sort of thinking of the £35,000 "safe" limit, and any interest bringing it over that. You could easily squirrel it away to another account every time interest took an account over 35k, were it paid monthly..

The concensus of opinion on other posts is that you should look at the "deposit" limit as being less than the £35k, allowing room to protect your interest. As you say, in an instant access account you can withdraw the interest but then you don't benefit from compounding (unless you consider the interest on interest in another account).

In a FTD, there are very few banks that will pay the interest out. I'd rather "mind the gap" and leave it in the original account.