Can anyone work this savings account/amount out for me, please?

[BIWI]

I've taken up an offer with my bank to save a certain amount of money each month, for a year.

This month, the account matures and I've received a letter from the bank telling me what options are now available to me with the money that has accrued.

One of the options is to take out another account.

But the example they've given of how much money this will earn is significantly different from what I was expecting - but I realised I don't understand enough about how it's worked out

The example I've been given is that depositing £300 per month, with 5.00% AER (5% gross) will result in a balance of £3,697.50 after 12 months.

I really don't know this figure has been calculated - I thought (presumably naively!), that each month, my £300 deposit would attract 5% interest. And that therefore the next month would be a new contribution of £300, added to what would have become £315.

However, I realise that this isn't the case, because each month my statement just showed the increase by £300 each month - i.e. month one showed a balance of £300, month two of £600, month three of £900, etc.

Therefore, I then assumed that the total for the year, £3600, would attract a 5% interest - which would be £180. But their example shows an increase of just £97.50!

Can someone tell me what's going on here? Is it just me?!

TIA

[LadyLapsang]

It's 5% per annum, not per month.

[BIWI]

But surely that should make £180, not £97.50?!

[Bluebiscuits]

But only the first £300 has been in the account for a full year and will receive the full 5% interest, everything else will have less interest. Also the interest might have been taxed.

[Rainybo]

But the whole 3k hasn't been in there the whole year, so you wouldn't get £180. I can't quite explain the mechanics, but I'm sure someone will come along with the ability to!

[AndNowItIsSeven]

You havent had £3600 in the bank for 12 months.

[AndNowItIsSeven]

Month one 5% of £300 month two 5% of £600 month three 5% of £900 etc all added together .

[AndNowItIsSeven]

Sorry it's not month one ......

[BIWI]

Ah yes. I see. That makes sense. Thanks!

[Oddbutnotodd]

Generally speaking whatever the annual rate quoted is, you will only actually receive about half in percentage terms as the average balance over the year is that. 5 percent a month would be 60 percent a year ! So £97.50 is correct. Each month the amount of money is going up but it is in the account for less time. The only way to earn £180 interest would be to deposit £3600 at the beginning of the year which isn't allowed. These accounts are a bit misleading and you should be given an illustration of interest. They are however a better bet than normal saving accounts.

[BIWI]

Thanks for the explanation - I'm still intrigued as to exactly how it's calculated. (Not because I don't trust them now but just so that I know).

I realise it's a much better interest than you can get elsewhere, but I was just shocked to see how little it actually translated to.

[Oddbutnotodd]

If you add all the interest for each month which is 1/12 of a year together they come to 78/144 which then multiplied by 5 percent ( if that makes sense) you get £97.50 interest for the year for £300 per month paid in to the account i.e. month 1 is 12/12 at 5 percent which is £15; month 2 11/12 at 5 percent which is £13.75 etc. Add them all up and it comes to £97.50.

[SandyDenny]

On a simple average you have had the equivalent of 1800 in the account for a year which at 5% works out at 90 interest, you've got the extra 7.50 from a little bit of compound interest each month.

Out of interest which bank is paying 5%?

[AndNowItIsSeven]

Nationwide .

[AndNowItIsSeven]

It's the flex regular saver, my current account is with them . I think you have to have it to have the savings account but not 100%.

[AndNowItIsSeven]

You can pay in up to £600 a month.

[AndNowItIsSeven]

Ahhh just checked as my account matures this month and they have changed the maximum monthly pay in amount to £250!

[thatstoast]

You can get 5% with m&s and first direct.

There a list of top accounts and a calculator on mse:

www.moneysavingexpert.com/savings/best-regular-savings-accounts?&_ga=2.25599034.66124947.1503267814-1764630905.1453933855#calculator

[BIWI]

Mine is with first direct. I'm lucky in that when I took it out it was at 6%, so I'll get a little bit more than the illustration they sent me - their Regular Saver now pays 5%, which is what the £97.50 is based on.

[SandyDenny]

Thanks for the account details, I don't have much to save but every penny adds up.

[nannynick]

Photo of how it calculates, thanks to @Oddbutnotodd for describing how it works.

[BIWI]

Thanks nannynick that's really helpful

[thatstoast]

Ooh a diagram. Don't usually get that on the money boards

[nannynick]

I was interested to see how it worked. Makes sense when you write it out.

[BIWI]

All of this has made me realise that I really don't know enough about finance. This sounded like a really good deal but I have no idea if it is now!

[thatstoast]

You won't get higher than 5% in a cash account atm so it's a good deal.

You could think about if there's anything else you could do with the money like pay off debt, overpay a mortgage, put it into a pension etc. For more risk you could invest in stocks and shares but you should be looking at doing this for a longer period than a year (5-10).

Before I joined mumsnet I was an ardent mse forumer. Learn a lot but the forums are rubbish now.