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just_red512 | About bank account interest rates? |
I want to open a savings account with 4.89% gross, 5.00% AER variable paid monthly.
Does this mean that this is the total interest I will earn for the year and it will be divided by 12 to be paid each month, or will I get this percent paid each month? |
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lisainredditch
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I use the following example in order to simplify the explanation. Say if u pay in a £100 now (provided that interest rate remains at 5% AER and u do not move the money), then a year later the balance of your a/c should be £105.
After the first month, u should have
£100 + ( £100 x 4.89% / 12 ) = £100.4075
After the second month, u should have
£100.4075 + ( £100.4075 x 4.89% / 12) = £100.8167
Basically after each month, u'll have a little more (compounded) so on and so forth.
The above calculation is if u r a non tax payer. In order to get tax free savings, u need to fill in an R85 application form in advance. This form can be downloaded at www.hmrc.gov.uk/forms/r85.pdf
Additional Note:
AER stands for annual equivalent rate and illustrates the interest rate if it was paid and compounded once each year.
Gross per annum is the annualised rate before deduction of tax at standard rate. |
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snetterton
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It's the annualised rate. Iif you're a tax payer then tax will be deducted automatically and you'll get the net rate. |
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mark
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That's the total for the year - but don't forget that interest you earn in month 1 will be added to your balance - meaning more interest in month 2, but you will have to pay income tax on this. |
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Andrew R
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It means that the 4.89% is the Annual rate but you will receive approximately 1/12th of it every month. The effect of compounding is that the Annual Equivalent Rate is in fact 5.00%.
I'm saying "approximately 1/12th" because, in fact, the bank will calculate daily interest and not all months have an equal number of days(!) but we'll keep it simple for the purpose of this example.
So, if you deposit USD 100 on 1st Jan, at the end of Jan you will receive interest of:
100 * .0489 / 12 = USD 0.4075 (if you're lucky, the bank will round up to USD 0.41)
This is added to you balance so that at the end of February, your interest earned will now be:
100.41 * .0489 / 12 = USD 0.40917 (again perhaps rounded to USD 0.41)
End of March:
100.82 * .0489 / 12 = USD 0.4108 ...you get the idea!
To calculate the AER given the basic rate, first workout the periodic rate (in this case, interest is paid monthly so divide by 12): .0489 / 12 = .004075
The compounded rate is therefore:
1.004075^12 = 1.05 = 5% AER
( ^12 in the above is shorthand for multiplying 1.004075 by itself 12 times!)
The fact that it says the 4.89 is a "gross" rate tells you that you will have to report the total interest you receive for the year on your tax return which, in the above example, would total USD 5.00.
Finally, note that the rate is quoted as "variable" which means that it could change from month to month depending on market interest rates. |
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vegas_iwish
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You don't get that every month-1/12th. annual rate. That's why money in the bank is an anchor pulling down your finances. |
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Cheryl S
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For even bigger rates - check out ING Direct (www.ing.com) or Household Bank (www.hsbc.com) |
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Franco
|
To calculate the monthly rate you must divide the gross rate by 12. The AER rate tells you how much you will get at the end of the year if you allowed the monthly interest to remain in the a/c and be compounded.
Thus in your case, the monthly interest you will get is
4.89/12 = 0.4075%. |
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Matt
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Compound me interest up baby. |
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