Posted on March 17, 2010.
About account bank interest rate? I want to open a savings account with 4.89% gross, 5.00% AER variable paid monthly.
Does that mean that the total interest I will win this year and will be divided by 12 to be paid each month, or will I get paid what percent each month?
I use the following example, to simplify the explanation. Say if u pay £ 100 now (provided that the interest rate remains at 5% AER and u do not move the money), then a year later, the balance of your A / C be 105 pounds.
After the first month, should have u
£ 100 + (£ 100 x 4.89% / 12) = £ 100.4075
After the second month, should have u
£ 100.4075 + (£ 100.4075 x 4.89% / 12) = £ 100.8167
Basically, after each month, u'll have a little more (combined) etc. etc..
The above calculation is if ura non taxpayer. In order to obtain tax-free savings U Need to complete a claim form R85 in advance. This form can be downloaded at www.hmrc.gov.uk/forms/r85.pdf
Additional note:
AER is the annual equivalent rate and illustrates the interest rate if it was paid and compounded once a year.
Gross per year is the annualized rate before deduction of tax at the standard rate.
This is the annualized rate. Iif you are a taxpayer, then tax will be deducted automatically and you will get the net.
This is the total for the year - but remember that the interest you earn in 1 month will be charged to your account balance - which means more interest in 2 months, but you must pay the Tax on this point.
This means that 4.89% is the annual rate, but you will get about 1/12th of every month. The effect of capitalization is that the annual equivalent rate is actually 5.00%.
I say "about 1/12th" because, in fact, the bank will calculate interest daily and not monthly an equal number of days (!), But we'll keep things simple for the purpose of this example.
So if you deposit $ 100 on 1 January at the end of January, you will receive interest:
100 *, 0489 / 12 = $ 0.4075 (if you're lucky, the bank will round up to USD 0.41)
This is added to your balance so that at the end of February, your interest earned will now:
100.41 *, 0489 / 12 = $ 0.40917 (again may be rounded to USD 0.41)
The end of March:
100.82 *, 0489 / 12 = $ 0.4108 ... you get the idea!
To calculate the AER as the base rate, the first meeting on a periodic rate (in this case, interest is paid monthly to divide by 12), 0489 / 12 =, 004,075
The rate is thus composed:
1.004075 = 1.05 ^ 12 = 5% AER
(^ 12 in the top is a shortcut for multiplying 1.004075 by itself 12 times!)
The fact that the said 4.89 is a "raw" tells you the rate you must report the total interest you received for the year on your tax return, which in the example above, would be to total of $ 5.00.
Finally, note that the rate is fixed as "variable" which means it could change from month to month depending on market interest rates.
You do not get that every month-1/12th. rate. Therefore the money in the bank is an anchor pulling down your finances.
For even more rate - Departure ING Direct (www.ing.com) or households of the Bank (www.hsbc.com)
To calculate the monthly rate, divide the gross 12. The rate AER tells you how much you get to the end of the year if you allowed the monthly interest to remain in the a / c and be aggravated.
So, in your case, the monthly interest you get is
4.89/12 = 0.4075%.
Compound interest me baby.
