ING Direct - How do they calculate interest?

[srg83]

Not sure if they have this posted on their website, or at least I didn't find it.

I have the regular savings account (well, it's the pre-tfsa but technically it's a regular account), interest rate is 2.7%. Normally I would divide that by 12 to get the monthly interest rate, and I calculated it that way - but it dawned on me just now that they might not do it that way since the account is only open for what - three months? So I divided by 3 and did the calculations and still got the wrong interest amount.

According to ING, they gave me $0.09 interest on $74.97. If I divide 2.7% by 3, interest should be $0.68; if I divide by 12, interest should be $0.17. And of course none of those numbers are including the fact that they say they will double interest earned (which I assume they will wait until the end of the promotion period before doubling the interest).

So how do they get $0.09 interest on $74.97? Average daily balance? I honestly do not know how to calculate that (though I would assume it's something like the balance/however many days are in the given month). If someone could help me out I would really appreciate it.

[dux]

17 cents sounds about right for 30 days.

Just make sure you had the money for that long.

[srg83]

I think by your reply I get why the interest charge doesn't correspond with my calculations.

-Account opened Oct 24 - $10; interest paid is $0.01 (7 days)
-Nov 3/4: Deposit of $15.47, withdrew $10.00 to bank account (long story lol) - $15.47 balance
-Nov 14 $40 deposit from bank, $55.47 balance
-Nov 25 - $15 withdrawl to bank, re-deposited Nov 27 (moving money around)
-Nov 28 - $19.50 deposit, $74.97 balance
-Nov 30 $0.09 interest paid

So still confused as to how they calculate it, but I see now that I didn't get 17 cents because the $74 wasn't in there for all 30 days - it added up through various contributions.

[rems]

Not sure if they have this posted on their website, or at least I didn't find it.

I have the regular savings account (well, it's the pre-tfsa but technically it's a regular account), interest rate is 2.7%. Normally I would divide that by 12 to get the monthly interest rate, and I calculated it that way - but it dawned on me just now that they might not do it that way since the account is only open for what - three months? So I divided by 3 and did the calculations and still got the wrong interest amount.

According to ING, they gave me $0.09 interest on $74.97. If I divide 2.7% by 3, interest should be $0.68; if I divide by 12, interest should be $0.17. And of course none of those numbers are including the fact that they say they will double interest earned (which I assume they will wait until the end of the promotion period before doubling the interest).

So how do they get $0.09 interest on $74.97? Average daily balance? I honestly do not know how to calculate that (though I would assume it's something like the balance/however many days are in the given month). If someone could help me out I would really appreciate it.

The interest rate you are given there (the 2.7%) is the yearly rate...doesnt matter that your account is only open for 3 months.

and it's caculated based on the average daily balance so they don't get screwed if you put an amount 1 day before the end of the month and getting credit for 30 days for that amount.

[myapple]

If you want a more exact calculation of interest, use 365 days, not 12 months.

In your case, I don't think you had the $74 in your account for the full 30 days in november. Based on only $0.09, it appears that you earned interest for 15-16 days, not 30.

[srg83]

Okay, since my original question is answered (how they calculate the interest), a couple new questions.

How would you calculate interest using 365 days vs 12 months? Just pulling this out of the air here, but is it something like (0.027 / 12)^365 ?

I really don't remember this stuff from my high school math :P

Second, how do they determine the average daily balance? Do they calculate it by simply doing, for example, ($74.97/30)*interest? I doubt that is the case since that gives me $2.50. Do they calculate it every 15 days or something?

I hope this stuff isn't basic calculations, as it would make my already math-challenged mind feel a little dumber :P

[gwu]

If I'm not mistaken...
(1+r/t)^t

(1+0.027/365)^365 is the effective daily interest rate (1.000073973)

You can substitute 365(daily) with 52(weekly) or 27(biweekly)

[srg83]

I'm confused by your calculations. I get 1.0000739723 with (1+0.027/365), and 1.0273667769 from (1+0.027/365)^365.

Shouldn't the effective daily rate be the second number?

[AllWheelDrift]

Average Daily Balance sum of balance at the end of each day / # days.

So

Nov 1st: 10.01
+
Nov 2nd: 10.01
+
Nov 3rd: 15.47
+
Nov 4th: 15.47
etc.

/30 days = ~38.72

(.027/12)*38.72 = ~8.7 cents which they rounded to 9 cents.

[srg83]

AllWheelDrift - thank-you. Looks like I completely forgot on how to calculate an average. Well, sort of...I wasn't thinking of figuring in the different daily sums when I tried figuring out the daily average. I had the right formula but the wrong numbers.

My numbers now add up to what ING has - thanks guys!

[at1212b]

Here's another simple way of looking at it as you can just separate your deposits and calculate the interest on it separately:

0.000073972603 (Daily Interest Rate = .0275/365)
Interest = I
Days = D

24-Oct $10___x___ 0.27392 = [(7d + 37D) x I] + [.01x30D(I)]
3-Nov $5.47__x___ 0.010520 = 26D x I
14-Nov $40___x__ 0.047342 = 16D x I
27-Nov $15___x__ 0.003329 = 3D x I
28-Nov $19.5__x__ 0.002885 = 2D x I

TOTAL = 0.091469 = $0.09 Interest for November.