How to calculate interest?

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How to calculate interest?
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marigold

Joined: 02 Sep 2005
Posts: 12458
Location: West Sussex

Posted: Fri Aug 25, 06 10:47 am Post subject: How to calculate interest?

I'm in the process of moving my savings from a monthly interest account to an annual interest one with a higher rate - my dim-at-sums question is this

. How do I work out how much interest I'll get over the year? I assume because of compounding it isn't a simple matter of lump sum x interest rate, so how do you work it out?

I want to know because I am keeping a very tight grip on my finances in an attempt to balance incomings and outgoings on a monthly basis, and I'd like to put something a bit more precise than "old monthly interest plus a bit" in the relevant box on my spreadsheet....

dougal

Joined: 15 Jan 2005
Posts: 7184
Location: South Kent

Posted: Fri Aug 25, 06 11:03 am Post subject:

Details details details

Different accounts *calculate* the interest differently and *pay* it differently.

Some might calculate it daily - that night's balance gets interest calculated for the previous 24 hours (very fair) - but only pay it (so it gets added to the amount on which interest is paid) only monthly, or bummer, annually.
Others might give interest only on the minimum balance during the previous month...

For approximate forecasting (where your balance on which the interest to be paid is itself being forecast) applying the published APR is probably a reasonable first estimate.

This link should be helpful
https://www.moneychimp.com/calculator/compound_interest_calculator.htm

marigold

Joined: 02 Sep 2005
Posts: 12458
Location: West Sussex

Posted: Fri Aug 25, 06 11:25 am Post subject:
Thanks dougal... better go and check the small print for how the interest is calculated, silly me just assumed it would be daily....

Treacodactyl
Downsizer Moderator

Joined: 28 Oct 2004
Posts: 25795
Location: Jumping on the bandwagon of opportunism

Posted: Fri Aug 25, 06 11:32 am Post subject:
Most accounts will give you an annual rate, even if it's paid or worked out monthly. Do the two accounts not give this or could you ask the providers?

marigold

Joined: 02 Sep 2005
Posts: 12458
Location: West Sussex

Posted: Fri Aug 25, 06 11:58 am Post subject:

I think I've just worked out what I was doing was doing wrong with my calculations - sooooo embarrassing. I just have a total mental block when it comes to "sums". Thanks chaps, it's like when you are debugging a programme - as soon as you ask someone else to look at your code you see what's wrong with it

marigold crawls back under her stone and wishes she had paid more attention in maths lessons.....

bluebell

Joined: 19 Aug 2006
Posts: 189

Posted: Fri Aug 25, 06 12:12 pm Post subject:
Personally, and not because I don't need the money, I do not calculate the interest. Any interest I receive is MY bit to do as I like with. So at the end of the year I could a nice little bit of pocket money with having touch any capital.

dougal

Joined: 15 Jan 2005
Posts: 7184
Location: South Kent

Posted: Fri Aug 25, 06 12:27 pm Post subject:

Treacodactyl wrote:

Most accounts will give you an annual rate...

I think its legally required that they publish the AER. My previous mistake its AER for deposit-type accounts where they pay you interest, not APR.
https://www.bba.org.uk/bba/jsp/polopoly.jsp?d=130&a=1467
I haven't grokked the assumptions they make about the way that the balance might vary - however the same assumption will have been made to calculate the APR for both accounts.
There's another matter as to whether or not the basis of AER calculation corresponds with the likely use of the account, but we can't know about that.

Here's an article about APR and loans - complete with an Excel spreadsheet but more usefully there are notes explaining about using various useful Excel functions with compound interest calculations.
https://www.iansharpe.com/art_apr.php

eleanor

Joined: 12 May 2005
Posts: 26

Posted: Fri Aug 25, 06 4:29 pm Post subject:

Quote:

Personally, and not because I don't need the money, I do not calculate the interest. Any interest I receive is MY bit to do as I like with. So at the end of the year I could a nice little bit of pocket money with having touch any capital

This sounds a great idea in theory, but you have forgotton something - inflation. With inflation currently running at about 2.5%, you need at least that amount in interest to stop the value of your capital depreciating. So by taking out the interest, you capital is reducing in value over time, not staying the same.

dpack

Joined: 02 Jul 2005
Posts: 46097
Location: yes

Posted: Fri Aug 25, 06 4:34 pm Post subject:
why not go for an ethical investment ? bit of risk but good return

marigold

Joined: 02 Sep 2005
Posts: 12458
Location: West Sussex

Posted: Fri Aug 25, 06 4:43 pm Post subject:

dpack wrote:

why not go for an ethical investment ?
bit of risk but good return

In my current circumstances I'm very risk-averse, but if you've got something specific in mind I'd have a look at it.....

dpack

Joined: 02 Jul 2005
Posts: 46097
Location: yes

Posted: Fri Aug 25, 06 4:49 pm Post subject:
ask about 5 yr investments in ethicals guarantee of investment back ,the profit depends try a few ,halifax ok (alledgedly)

bluebell

Joined: 19 Aug 2006
Posts: 189

Posted: Fri Aug 25, 06 4:54 pm Post subject:

elenanor think it depends on the amount of capital and whether you are thinking long term investment or just putting the money aside for a rainy day. I don't pay tax on interest therefore with the interest around 5% or more that currently covers inflation. I am also not investing long term.

I if had a large amount of capital to invest it would not be in bank but in bricks and mortar. Probably not very PC to some but then money is the root to all evil is it not

Friend of my mothers who's wealth is in excess of 6 figures told my mother never to invest more than £25,000 in any one bank as that is the limit of their insurance, may be a little more now but I doubt it. She invested her surplus after coverting all the banks in the town, in bricks mortar. Some she rented out, some she bought for her immediate relatives then sold the property when they died. She also lived entirely off the interest she earned. She did not touch the capital.

Treacodactyl
Downsizer Moderator

Joined: 28 Oct 2004
Posts: 25795
Location: Jumping on the bandwagon of opportunism

Posted: Fri Aug 25, 06 5:03 pm Post subject:
Marigold, if you pay tax have you thoguht about a cash ISA, the interest is tax free. eleanor, it's certainly wise to remember inflation and out of interest did you read the latest report that a more realistic rate is 10% for many people?

eleanor

Joined: 12 May 2005
Posts: 26

Posted: Fri Aug 25, 06 5:13 pm Post subject:

I did. I was talking about the above out on the basis that we were only taking inflation into consideration. You can add in whatever tax is paid on the savings too, if you like. Cash ISAs are the cheapest way to save, but in most cases, give a return only marginally above inflation etc., and have a limit of £3000 per year, and you have to look at the small print very carefully to make sure you are not being taken for a ride by e.g high rates of interest for a short time, which then plummet. Long term the stock market seems to give the best return, but you have to be prepared to ride the ups and downs, which wouldn't apply in Marigold's case as she has said she is risk averse. The same would apply for property, which appears risky right now.

The whole thing depends on how much money you have to save, short or long term, and your attitude to risk, as I understand it.

Eleanor (failed financial adviser - I was too concerned about ethics and absolute returns).

dpack

Joined: 02 Jul 2005
Posts: 46097
Location: yes

Posted: Fri Aug 25, 06 5:18 pm Post subject:
or burn it and catch fish

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