{"id":171,"date":"2011-04-09T19:50:34","date_gmt":"2011-04-09T19:50:34","guid":{"rendered":"http:\/\/www.sharonmurphy.com\/wordpress\/?p=171"},"modified":"2020-07-24T13:35:59","modified_gmt":"2020-07-24T12:35:59","slug":"know-your-aers-from-your-elbow","status":"publish","type":"post","link":"https:\/\/www.sharonmurphy.com\/wordpress\/2011\/04\/know-your-aers-from-your-elbow\/","title":{"rendered":"Know your AERs from your Elbow"},"content":{"rendered":"

\"You<\/a>I was in my local Bank of Ireland during the week when I spotted a fantastic looking offer: a savings account offering 9% interest! Wow! Sounds great! So I made enquires at the customer service desk.<\/p>\n

Turned out, the 9% interest is earned over a two year term, not per annum. I would earn 3% interest in year one, at the end of which I would have an option to withdraw some\/all of my money, and what was left on deposit would roll over to a 6% rate in year two. OK – so was it still a good deal?<\/p>\n

Currently, the best lump sum deposit rate<\/a> available is ~3.1% AER, and the best 1 year fixed term deposit rate<\/a> is 3.7% AER.<\/p>\n

AER stands for Annual Equivalent Rate and is a way of quoting interest rates for accounts of different terms, or that pay interest at different intervals (monthly, quarterly, annually etc.), to make them directly comparable.<\/p>\n

So back to BoI’s 3% + 6%. Assuming I could commit to leaving my full lump sum on deposit with BoI for 2 years, what would the AER be?<\/p>\n

Well, at the end of year one, I’d have 103% of my original investment; and at the end of year two I’d have 106% of the account value at the end of year one. So my total at the end of two years would be 109.2% of the invested sum – making the interest slightly more than the 9% on the poster.<\/p>\n

If I take the square root of that total, I get just shy of 104.5%, so an AER of ~4.5% annually.<\/p>\n

\u221a(1.03×1.06)=1.04489<\/p>\n

That’s still better than the current rates available, so I’m back to thinking it sounds like a good deal.<\/p>\n

What it comes down to next is whether I believe I can afford to leave my money on deposit for 2 years untouched. If not, then I’ll be missing out on 0.7% elsewhere in year one.<\/p>\n

But if I go with the (relatively) instant gratification of 3.7% now, what kind of rate will I be looking for in one year’s time to match what I would’ve made on the BoI deal?<\/p>\n

1.092\/1.037=1.053<\/p>\n

That means I’ll want to find an account offering 5.3% in one year’s time to earn the same interest as if I’d taken up BoI’s current offer. That’s an increase of 1.6% on the best 1 year fixed term deposit currently available – quite a jump. But then, the ECB has<\/em> started raising interest rates… Hmmm…<\/p>\n

So, there we go, on Grand National day, I’m left with a gamble – but at least I’ll be guaranteed some return whichever way I bet on this one. Maybe I’ll toss a coin…<\/p>\n","protected":false},"excerpt":{"rendered":"

I was in my local Bank of Ireland during the week when I spotted a fantastic looking offer: a savings account offering 9% interest! Wow! Sounds great! So I made enquires at the customer service desk. Turned out, the 9% interest is earned over a two year term, not per annum. I would earn 3% … Continue reading “Know your AERs from your Elbow”<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-171","post","type-post","status-publish","format-standard","hentry","category-uncategorized"],"_links":{"self":[{"href":"https:\/\/www.sharonmurphy.com\/wordpress\/wp-json\/wp\/v2\/posts\/171","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.sharonmurphy.com\/wordpress\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.sharonmurphy.com\/wordpress\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.sharonmurphy.com\/wordpress\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.sharonmurphy.com\/wordpress\/wp-json\/wp\/v2\/comments?post=171"}],"version-history":[{"count":5,"href":"https:\/\/www.sharonmurphy.com\/wordpress\/wp-json\/wp\/v2\/posts\/171\/revisions"}],"predecessor-version":[{"id":1510,"href":"https:\/\/www.sharonmurphy.com\/wordpress\/wp-json\/wp\/v2\/posts\/171\/revisions\/1510"}],"wp:attachment":[{"href":"https:\/\/www.sharonmurphy.com\/wordpress\/wp-json\/wp\/v2\/media?parent=171"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.sharonmurphy.com\/wordpress\/wp-json\/wp\/v2\/categories?post=171"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.sharonmurphy.com\/wordpress\/wp-json\/wp\/v2\/tags?post=171"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}