We know that alongside savings comes some unfamiliar terms and confusing words. So, we’ve put together a short list of some of the most common savings terms and what they mean. It’s by no means an exhaustive list, but it should help you get started on your savings journey.
What does paying interest mean? – Interest is the money that you earn on your savings, which is displayed as a percentage. The higher the percentage, the more interest you get. It is proportional to your savings, so when there’s more money in the account, you get more interest.
What is AER % rate? – AER stands for Annual Equivalent Rate. These help you compare rates across different accounts. A higher AER means more interest paid to you overall. AER is different from interest as it considers how often you get paid interest.
For example, an account that pays 4% interest as 2% every six months will earn you more than an account that pays 4% interest at the end of the year. This is because when the first interest is added to your account, your savings are larger, and therefore the second interest will be higher. The interest that you have already been paid will itself earn interest as part of your savings.
Therefore, the AER on these accounts will be higher to show this.
What is compound interest? – Compound interest is when you are paid interest on previously earned interest. Whatever interest you have already earned from your savings will be added to your account, and so the next time you earn interest, the total will already be higher. Compound interest means that your savings will grow a little faster.
What is the difference between a gross and net interest rates? – Gross interest is the amount of interest you’ve earned before tax is taken off. Net interest is the rate of interest you earn after tax has been paid. Net interest is the amount of money you will actually earn. Unless your savings or salary are on the upper end, it is unlikely you will need to pay any tax on the interest that you earn.
What are variable and fixed rates of interest? – If your savings account has a variable rate of interest, it can go up or down while you own the account. If the account is fixed interest, it will stay the same for a period of time, which providers must be clear how long this period is.
How do interest payments work on a regular monthly savings account? – Each month the amount that you earn is calculated based on the interest rate of your account and how much money you have in your savings at that time. When the amount of savings in your account changes, so does the amount of interest that you earn. If the interest rate is 2%, the total interest you will receive at the end of the year will not be 2% of the amount in your account. This is because interest is worked out each month, and as in the earlier months there will be less savings you will have earned less interest.
Visit the UK Savings Week website