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Yes you are!

Interest on regular savers is not calculated on the average balance, but is rather calculated on the money in the account each day: the two are not the same!

Originally posted by **ValiantSon**
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But the average amount of money in the account over an interest period is calculated by reference to your data, which is,

__the money in the account each day__. So if you know the weighted average balance that will be in the account, and the annual interest rate applied to such amounts, you can multiply them out and see how much you'll get.

For a given interest calculation period, you are saying that they look at the balance at the end of each day and calculate interest on it and then add up the chunks of interest to get the total interest to pay. I wouldn't disagree with that, as it's a practical way to do it and banks need to know their daily exposure. But it's effectively the same number as you would get by looking, after the fact, at the average balance held for the relevant interest calculation period, and multiplying that average balance for the period by the rate for the period to get the amount which should be accrued.

It's true that the MSE method is just a simplistic shortcut. If the method of calculation were to look at a more complex set of circumstances it could still work to the nearest few pence; you just have to perform the "average" calculation at a nice granular level of detail to be able to feed it the inputs.

For example, they have Mr Matt Mattics where his "average balance was

__roughly__ half the £3,000, in other words £1,500... so Matt should expect to earn

__around__ 10% of £1,500"...

Instead, they could have an example customer Mr Arif Metic where his average balance was , not roughly but

__actually__ £1620 for the one year period. And so Arif with his 10% per year interest rate should expect to earn £162 for the one year interest period. It's convenient for people using averages when the interest periods are a year long and pay interest all at the end - as they are with popular regular savers such as Nationwide's - as it means you don't have to worry about doing twelve separate interest periods and feeding the received monthly interest into your weighted average balance calculation.

The reason the MSE simplified example is not accurate is because the average balance fed into it for the interest period is not accurate. If you improve the accuracy of the data fed into it, you improve the quality of the output so that you don't need to calculate 365 interest components and add them up to find a 'better' number.

You mentioned in an earlier post:

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The MSE guide is intended to show, in simple terms, what is going on, but in reducing it to simple terms, it also becomes a little misleading. Interest is not paid on the average balance

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. Of course, it's a simplification to show the basic effect (and explain the reason why you don't get paid on the full £3k if your average deposited with the bank was some lower number).

Of course, if your average balance of £1500 is only a guesstimate, the answer is only going to be in the same ballpark but not very accurate. If you replace £1500 with an actual observed and calculated average, it's probably close enough - not so far off as to say that using an average method is going to get you a poor and inaccurate result.