Question about ING account

[AutumnxButterfly]

I have a question about this. I know this is going to sound stupid but I am still new to all of this. OK. I have an ING account that has an interest rate of 4.5%. I have around $1200 in it right now. (Thanks to the $20 challenge ) My question is this. If $1200 x 4.5% = $54, why does it only earn around $1.00 a month?

[crabbypatty]

Wow, I'd call them if I were you. There's a problem.

[AutumnxButterfly]

Oh really? I thought I was calculating somethign incorrectly. LOL I will have to give them a call.

[LuxLiving]

Autumn when during the month did you put the money into the account? If you only put it in the last couple of days in the month, then you'll only earn interest for the days the balance was actually in the account. An account that has 1200 in it on the 1st thru 31st is going to earn more interest than one that only had money in it from say the 27th thru the 31st.

[ktmarvels]

Also remember that the 4.5% is the annual rate. Over the course of the year you should earn 4.5%, but only about .4% is made in interest each month.

[PRICEPLUS]

Please do let us know how this turns out.

[cptacek]

Interest = Principal * Interest Rate * time in the account / time units per year.

Monthly Accrued Interest = $1200 * .045 * 1 month / 12 montsh in a year = $4.50 a month.
Daily Accrued Interest for February = $1200 * .045 * 28 days in February / 365 days in a year = $4.14 a month for February
Daily Accrued Interest for March = $1200 * .045 * 31 days in February / 365 days in a year = $4.59 a month for March

Of course, as Lux said, you have to have it in there the whole month to earn interest the whole month.

I don't know how ING figures their interest (daily or monthly).

[kimiko]

Their interest compound annually. However, seeing how your interest grows daily, I would say they count the days and not the month.

[cptacek]

I got this from the ING website:

https://home.ingdirect.com/faqs/faqs.asp?s=OrangeSavings&NF=false#calculate

How do you calculate the interest on my account?
Interest on your savings account is accrued daily, compounded monthly and credited to your available balance at the end of each month.

Here is a good article about the differences between APY and APR:
The Simple Dollar » Explaining Simple Interest, Compound Interest, APR, and APY

And here is how to calculate it:
The Simple Dollar » An Introduction To Compound Interest With Spreadsheets, Part 2: Monthly Compound Interest, APRs, and APYs

[cptacek]

The "accrued daily, compounded monthly" was throwing me. But, I think what that means is they figure the interest as a daily rate, but don't compound it until the end of the month.

So, instead of 4.5% interest for a whole year, use 4.5% / 365 = .0123% or .000123 for the rate.

Interest = Principal * daily rate * number of days in the account for that month

For the month of January, it would be:
Interest earned for all of January = $1200 * .000123 * 31 = $4.57

Then it is compounded at the end of the month, so add $4.57 to the $1200 for your beginning balance for February:
Interest earned for all of February = $1204.57 * .000123 * 28 = $4.19

Then, it is compounded again, so add the $4.19 to the $1204.57 for your beginning balance for March.
Interest earned for all of March = $1208.72 * .000123 * 31 = $4.61.

Notice that the number of days in January and March is the same, but the amount earned in March is higher than the amount earned in January. That is what people mean by "the power of compounding". You earn additional interest on the interest you earned the month before.