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I am currently saving £200 each month to a Nationwide regular saver paying 4 per cent which is the maximum I can transfer each month.
I have also opened an easily accessible account with Zopa Bank that pays me 2.86 percent, which I usually transfer each month to whatever money I have left over.
I’ve noticed that with Zopa, interest is added every month, while Nationwide only adds interest 12 months after opening the account.
Does this mean I might even make a loss putting money into the highest paying regular saver instead of putting everything into the lower easily accessible rate? Via email
Compounding: This means that savings or investments can snowball over time as you earn a return on top of the profit you’ve already made
Ed Magnus of This is Money replies: This is a perfectly reasonable question. You are essentially concerned about missing out on your interest that accrues over time.
The achievement of return on top of the return is compounded. This means that saving or investing can snowball over time as you earn a return on top of the profit you’ve already made.
For example, if a £1,000 deposit has grown by 4 percent in a year, that would mean its value has increased by £40.
If they make a 4 per cent return on what is now £1,040 in the following year, the value will increase by £41.60 and they will end up with £1,081.60. This continues over time, and the longer it lasts, the greater the effect.
Over a 10-year period, you’ll earn £480.24 in interest. Without composition that would have been £400.
The fact that a savings account pays interest monthly instead of annually can make a small difference due to compound interest.
That’s why most savings accounts split your returns into the AER. This stands for Annual Equivalent Rate.
What is the AER on a savings account?
The AER shows what the interest rate would be after a full year, including any compound interest you would get from each interest paid each month.
The AER therefore makes it easier to compare how much interest you could earn on a savings account if it were open for a year, regardless of the term or type of savings account.
Gross rate is the interest rate you would earn when you start taking out a savings account. The gross rate may be higher or lower than the JER.
In the case of Zopa, the gross rate is 2.82 percent and the AER is 2.86 percent.
Someone who deposits £200 each month into Zopa’s Smart Saver account will earn £37.51 over a year.
The rate for your National ordinary savings account is 4 percent gross/AER. There is no monthly composition, which means that the gross rate and AER differ.
Someone who deposits £200 each month into Nationwide’s regular savings agreement and pays 4 per cent AER will earn £52.64 in interest after a year.
That’s why it’s wise to continue paying £200 a month into your Nationwide regular savings account rather than moving what you’ve already saved into your Zopa easy-access deal.
We spoke to a spokesman for the Savings guru for their expert advice.
The AER shows what the interest rate would be after a full year, including any compound interest you would get from each interest paid each month.
The savings guru replies: Both accounts calculate interest on a daily basis, so your reader will receive interest on the amount they have in their account regardless of when the interest is actually paid.
This means that when the interest is paid, it will not affect how much interest they earn.
However, given this, they will see a big difference in regular savings as they earn 4 per cent on £200 in the first month, 4 per cent on £400 in the second month and so on.
However, if they were to deposit £2400 into the Zopa account on day one, they would earn more interest on the Zopa account compared to what will earn £200 per month at 4 per cent, due to the timing of those monthly payments.
Someone who deposits £2,400 into the Zopa account from day one will get £2,469.55 after a year, while someone who trickles £2,400 through twelve monthly deposits of £200 will get £2,452.64.
Regular savers are great for people who drip. For example, if you want to set aside € 200 from your salary each month.
However, easily accessible accounts are often better, even at lower rates, for one-time funding. If you have the money up front, the daily interest on that lump sum is often better than trickle feeding through a regular saver, even if the regular saver has a higher rate, because you won’t earn that higher rate on the entire amount until the last month.
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