I am currently saving £200 each month in a Nationwide regular saver paying 4% which is the maximum they allow me to transfer each month.
I also have an easy to access account opened with Zopa Bank which pays me 2.86% to which I usually transfer the remaining money that I have left every month.
I noticed that with Zopa interest is added monthly whereas Nationwide will not add interest until 12 months after account opening.
Does that mean I could actually lose by putting money into the highest paying regular saver rather than putting it all into the lowest easy access rate? By email
Compound: This means that savings or investments can snowball over time as you earn a return on top of the gains you have already made.
This is Money’s Ed Magnus responds: It’s a perfectly reasonable question. You basically worry about not enjoying the growth of your interests over time.
Earning returns on top of returns is called compounding. This means that savings or investments can snowball over time as you earn a return on top of the gains you have already made.
For example, if a £1,000 deposit increased by 4% over a year, that would mean its value increased by £40.
If they make a 4% return on what is now £1,040 the following year, then the value increases by £41.60 and they end up with £1,081.60. This continues over time, and the longer it lasts, the greater the effect.
Over a period of 10 years, you will earn £480.24 in interest. Without composition it would have been £400.
Whether a savings account pays interest monthly rather than annually can make a slight difference due to compounding.
This is why most savings accounts break down your return into AER. This is the annual equivalent rate.
What is the ARE 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 any interest paid each month.
The AER therefore makes it easier to compare the interest you could earn on a savings account if it were open for one year, regardless of the term or type of savings account.
The gross rate is the interest rate you would earn at the start of a savings account. The gross rate can be higher or lower than the AER.
In the case of Zopa, the gross rate is actually 2.82% and the AER is 2.86%.
Someone depositing £200 each month into Zopa’s Smart Saver account will earn £37.51 over a year.
With your regular Nationwide Savings Account, the rate is 4% gross/AER. There is no monthly compounding to defer the gross rate and AER.
Someone depositing £200 each month into Nationwide’s regular savings agreement paying 4% AER will earn £52.64 in interest after one year.
Therefore, it would be wise to continue putting £200 a month into your regular Nationwide savings account rather than moving what you’ve already saved into your Zopa easy access offer.
We spoke to a spokesperson for the Savings Guru for their insightful opinions on the subject.
The AER shows what the interest rate would be after a full year, including any compound interest you would get from any interest paid each month.
The savings guru replies: Both accounts calculate interest daily, so your reader will earn 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 does not affect the amount of interest they earn.
However, given this, they will see a big difference in regular saving as they earn 4% on £200 in the first month, 4% on £400 in the second month and so on.
However, if they were to put £2400 into the Zopa account on day one, they would earn more interest on the Zopa account compared to what £200 a month would earn at 4%, due to the timing of those monthly payments.
Someone who hides £2,400 in the Zopa account from day one will end up with £2,469.55 after a year, while someone who drips the £2,400 through twelve monthly deposits of £200 will end up with £2,452.64.
Regular savers are great for drip feeders. For example, if you want to set aside £200 of your salary each month.
However, easy-to-access accounts will often be better, even at lower rates, for flat-rate financing. If you have the money up front, then often times the daily interest on that lump sum will beat the drip feed through a regular saver, even if the regular saver is a higher rate, because that’s not than the last month you earn this higher rate on the total amount.
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