I'm sure this is really simple but just to 'be sure to be sure' I would appreciate an idiots guide in trying to work out what I'm working out…

I lent my brother-in-law a LOT of money recently for two months. Im talking tens of K's here and he was keen to pay me back any interest I lost as I had to take it out of my savings account.

Say, for arguments sake I had 75,000 in my account and lent him 45,000 for two months and my account was paying a gross rate of 1.75. How do I work out the gross amount lost please?

If you need to know I would probably have had the money in my account for 12 months without making a withdrawel had I not had to lend him that cash.

Hope that you can help!

Ta.

(45,000 x (1+1.75%)^(61/365)) – 45,000

That assumes that your bank pays you an annual equivalent rate of 1.75% calculated daily compounding.

61 days = 2 months
"^" means "to the power".

if you give me the other 30K you'll not be getting any interest at all and so won't miss the bit your brother-in-law has removed

I'd have to look in the small print to check your assumption but can I assume that on a 'bog standard' savings account interest would be calculated daily compounded?

Question – (1+1.75%) = 2.75 or 2.75% or 1.0175 ?

😎

Thanks!

If you're only getting 1.75% you also need to start a 'Best Interest Rates Thread'.

scotser – yes interest will most likely compound assuming no withdrawals.

1+1.75% = 1.0175

So that formula gives me the amount I lose if I lend 45,000 irresepective of the intial balance (before lending) and remaining balance (after lending) in the two month period?

It looks like it does but Im just checking.

£130 is what it works out to with 45K borrowed – doesnt seem like much but the interest rate is pretty paltry.

Cheers again.

My recommendation is not to lend it to him in the first place.

you're calculating just the interest lost on that sum that isnt in the account for the period.

Interest rates are very low at the moment.

1.75% for the year on 45k is £787.50 assuming 45k went in at the begninning and no withdrawals were made. One sixth (2/12) of that is £131 (slightly more than the £128 my calc gives you because of the effect of compounding interest over the remaining 10 months)

To be in the same place as you would be if you didn't lend your bro any money, dont forget to put the £45k AND the £128 back into the account after the two months otherwise the compounding will come in slightly lower than £787.50

Work out compound rates

More important than the interest lost to your brother is that you should never have that much cash in a bog standard account! 2 reasons:

You're over the FSCS* Limit of £50,000 for deposits – so if the bank went bust (assuming a UK institution) you'd lose £25,000!?!

Second reason is that 1.75% is a shocking rate, especially if they are long term savings – in fact you're probebly losing money when you factor in real inflation. Get yourself off to see a proper investment adviser sharpish! Happy to recommend one if needed.

* = Financial Services Compensation Scheme:

http://www.fscs.org.uk/consumer/key_facts/limitations_of_the_scheme/compensation_limits/