Silly question re savings

[Pablosdog]

Please excuse my ignorance here!
I have 10k in a 5% savings (Tandem)
I have opened a 7% saving account which I can transfer a max of £300 a month into for 1 year (First Direct) the interest compounds and is paid at maturity.

I planned to withdraw £300 a month from Tandem and put it into the First Direct account as it’s higher interest.

My husband says I’ll earn more overall leaving the full sum in Tandem due to the interest being paid on the total amount. Is he right?

^ that was to @isthewashingdryyet

Hahahahaha. That’s quite an arse of myself I’ve made. I need a financial audit asap…

@isthewashingdryyet

If you have a lump sum already, you can maximise your interest by having it in a normal savings account and moving part of it month by month into a regular saver. You get the interest from your normal saver up until the point that you move it, then you get the interest from the higher rate regular saver. Each are obviously pro-rata-ed for the time the money is in the account so it's not a straight forward calculation. But any amount of time in the better % account yields a better result than that same amount of time it would have been in the normal account.

Please - trust me!

Oh, was I not spectacularly wrong after all?

This was my thinking - it just seems obvious that you want as much money as possible in the highest performing place available as soon as you can. Sunglasses emoji returned, pp!

Oh dear

You can use this calculator to help. You will be better off if you move the money gradually over to the 7% account.

I know, I know 😂😂😂 I’m so ashamed at my bad calculating!

Oh, yes, you are quite right @Echio , I did forget that they money will be earning 5% til it is moved.

but will the 5% account let the OP do that as the accounts I have at that rate penalise me if I withdraw more than three times a year, or the other account the rate drops to about 0.5% for the month.

I have also found I get caught out by these monthly accounts and they end up being a nuisance, so that does colour my answer

Do you get 7% of what’s in the account each month? Like this
7% on 300 month 1 (£21)
7% on 600 month 2 (42£)
7% on 900 month 3 (63£)
etc then add all up for the end of saving period

@isthewashingdryyet No worries - yes it is definitely worth checking all terms of these kinds of accounts, and there is a bit of a faff involved - sometimes you have to post a letter to close an account, things like that - which is kind of annoying when you know it's so unnecessary!! The regular savers often don't allow withdrawals too so you need to be comfortable locking it away. If all of that's okay there's some great rates out there at last :) (well, not compared with inflation... it just feels great after years of no interest at all!)

No. 7% is the APR. So in month one you get 11/12th of the 7%. If you only put £300, you'd get £21 for the full year, not 12x £21.

Essentially, over the year, you get 3.5% on the total. Ignoring whatever else is happening with the money before it gets to the regular saver account.

I think your husband has forgotten to account for the fact that the money will be earning 5% until it’s transferred over. Normally for a lump sum monthly savers aren’t necessarily the best rate; but if it’s earning decently until it’s transferred, that’s what tips it over into becoming the best deal.

Not quite...

The interest for a full year would be £252 if the full £3,600 was in the account all year (3600x7%), but because the money's going in bit by bit, the interest you get paid is around half what it would be if the money was there all year.

What you've done is double count all the money (So, 300 of your 600 from month 2 you've already calculated the interest on from the first month), and then not reduce it for the shorter period of time each subsequent addition is in the account.

In this case, it's still worth moving it across from the 5% account because you're still making the 5% until you move it (apportioned again for the time it's in the account).

The unfounded confidence of those saying leave it at 5% is truly astounding.

Every day, every £100 in the 5% account will earn 1.3p. Every day £100 in the 7% account will earn 1.9p.

Therefore it’s better to have as many £100s in the 7% account as is possible for as many days as is possible.

And move the 5% balance to the Santander Easy Saver 5.2%.

The Santander account is closing to new applicants tonight.

Therefore it’s better to have as many £100s in the 7% account as is possible for as many days as is possible.

But the OP can only move a maximum of £300 every month into the FD 7% interest account.

Hence ‘as many as possible’. Any money you can be earning 7% on, for any length of time, is preferable to earning 5% on the same amount for the same period. Really the only arithmetic you need to be able to do is ‘which is the greater of 5 and 7?’

My, what a load of nonsense to overcomplicate a very simple decision.

Which number is bigger, 5 or 7? It is not a trick question.

Yes, if you have access to a FD regular savings account, take it. I don't know if you can do the direct transfer from your Tandem account or will have to route it through your FD current account (if you can't afford to save the £300 from salary, leaving your current savings untouched that is).

But yes, OP, you are right. For the money that gets saved in the FD RS for the next year, it will earn more interest than it would in the Tandem account because 7 is bigger than 5.

As soon as the year is up the money needs to be transferred as it will revert to a regular savings account currently paying 2% and the few extra pounds gained in interest will soon be negated. Also as someone else said, can the money come straight from the 5% account or does it have to be routed through another First account?

It's not as simple as that because the rate across the year is more like 3.5%, which is less than 5.

But of course, the money not yet transferred is still getting the 5%, which then makes it complicated.

If you had money at 0% and transferred it, it would be getting 3.5% over the year.

But with it getting 5% until it's transferred the rates need to be aggregated. So, the first month £300 is at 7% (so gets 1/12th of 7%), while £3,300 is at 5% (so getting 11/12ths of 5%), and so it goes with £300 going over each month, increasing the amount at 7%, decreasing the amount at 5% each month.

It does work out better, but only by about £20!

It has to go via the FD current account, but you can set it up to go the same day.

I was temporarily drawn on these calculations yesterday and then regained the basic sense I’d had in the first place. You don’t need to do any of these numbers. You just need to know that 7 is bigger than 5 and that therefore any sum of money will do better gaining 7% interest over any period of time than it would have done gaining 5% interest over the same period of time.

And that’s some great, detailed maths to show that 7 is greater than 5, so 7 is better.

Your workings show how much better 7 is than 5 (because the answer isn’t 2 in this case), but the fundamental question is which account has the bigger number and that is better.