Monthly interest savings accounts pay interest monthly, depositing the interest either into a bank account you nominate or back into your savings account, where they accumulate through compounding.
What’s the difference between monthly interest and annual interest?
The difference between monthly and annual interest is that annual interest is paid after a year, whereas monthly interest is paid monthly, making it a good option if you want a regular income stream.
However, savings accounts that pay interest annually typically offer more competitive interest rates because of the effect of compounding. In simple terms, rather than being paid out monthly, annual interest can accumulate over the year, potentially leading to higher returns on the sum you’ve invested.
Is it better to have interest paid monthly or annually?
When it comes to saving and investing your hard-earned money, an important decision you’ll have to make is whether to have your interest paid monthly or annually. Savings accounts paying monthly interest are a popular choice for those who rely on their savings as a source of income, or for individuals looking to maximise their liquidity. However, it’s worth checking exactly how much interest you’ll earn.
For example, a regular savings account may offer a high interest rate, but there’s a limit on how much you can deposit (for example, £200 a month), and you would only get the benefit of the full interest rate on £2400 (£200 a month for a year) at month 12. In comparison, if you deposited £2,400 into a 1-year fixed rate bond, you would start earning interest on the full amount from the first day, thanks to the effect of compounding.
What is compound interest, and how does it work?
Compound interest is the interest you earn not only on your original deposit, but also on the interest you’ve already earned. You might find that the best monthly interest accounts are also the ones which offer compound interest, as you’ll keep earning interest on each previous month’s interest. This compounding effect accelerates the accumulation of interest, which could lead to a significant and rapid boost in savings.
