Can someone talk to me about interest rates?


(Morty) #1

So with the introduction of Saving pots, I realise that I don’t understand interest rates like I thought I did.

So Monzo pay 1% on savings pots.

Let’s say (for ease of maths), I put £10k into a savings pot.

For me that means that over the course of the year I am thinking that I should earn 1% of £10k (or £100) in interest.

That payment is made monthly, so I would expect to receive to receive 12 equal deposits of my £100 (or £8.34/month)

However, looking at what I received in my actual savings pot, I’m getting nowhere near that rate. Using the example above, I’d probably receive something closer to 60p-70p per month instead.

So what am I missing here? I’m assuming I’m just being silly/naive but would like to get up to speed on this.

Cheers,


(If there's the wrong end of a stick, you'll find me holding it.) #2

Has your money been in the pot for a full month?

I don’t use Savings pots so I don’t know if the interest is paid after a month, or on a set date every month (the latter, I assume).


#3

£1,000 will get you 83p a month interest at 1% (I think).


From - https://www.thebalance.com/calculate-monthly-interest-315421


(Dan) #4

You’re exactly right, that is how it works.

A couple of factors that might affect the amount of interest you receive initially:

as @Anarchist said, you’ll only see the full benefit after holding your entire deposit in a savings pot for the whole month and;

due to the effects of compound interest, the amount paid out for interest will be lower in the first few months than the latter few (not by a huge amount, but if you’re calculating and wondering why the figures are off - this might be why).

The rate is 1% over a year compounded. So it’s not 1% / 12 (0.0833%). 0.0833 ^ 12 is actually = 1.116 and that’s a little higher. The monthly rate will be closer to 0.08254042%.

0.08254042 ^ 12 = pretty much 1%. So if you have £1,000 in a pot for an entire month, you should expect £0.825 for your first months payment.

I really hope I’m doing the maths right there otherwise that’ll be very embarrassing.


(Jack) #5

This guide from Monzo may be a good read for you :slight_smile:


#6

The Khan Academy has free video tutorials that will take you through this in more detail.
Well worth a look to get a better understanding.

https://www.khanacademy.org/economics-finance-domain/core-finance/interest-tutorial


(Richard) #7

The rate is 1% over a year compounded. So it’s not 1% / 12 (0.0833%). 0.0833 ^ 12 is actually = 1.116 and that’s a little higher. The monthly rate will be closer to 0.08254042%.

0.08254042 ^ 12 = pretty much 1%. So if you have £1,000 in a pot for an entire month, you should expect £0.825 for your first months payment.

As someone who is really bad at Math
:exploding_head::exploding_head::exploding_head:


(Morty) #8

Thanks for the responses everyone - much appreciated!