# Savings Interest CalculationMarch 29, 2023 10:29 PM   Subscribe

i owe restitution to someone from 2013. help me figure out how much.

i know the principle amount. i would like to suggest to my debtor a total that includes an interest calculation. perhaps a common savings account rate? how should i do this fairly?

assume i can't simply ask them what a proper amount would be. thanks!
posted by j_curiouser to Work & Money (11 answers total)

Best answer: You might use the IRS underpayment interest penalty the IRS applies if you don't pay your taxes. For 2023, the IRS increased them to 7%.

If you owed the person the money on January 1, 2013, and paid it off today (roughly end of first quarter of 2023), then you would want to add an additional 49.24%, if I did my math correctly.

Your use of the term "restitution" suggests that this is a legal requirement for you rather than an informal agreement. If so, it's likely whatever contract you signed for the money will provide an interest rate for delayed payment. It's common in legal cases to use a one year Treasury bill interest rate for interest on judgements.
posted by saeculorum at 10:54 PM on March 29, 2023 [2 favorites]

Best answer: You could use the IRS underpayment interest rates which are the amount that would be added to back taxes you owe to the IRS. Or you could use the federal short-term rate directly.

The federal short-term rate is usually close to what a high-yield savings or money market account would earn. The IRS underpayment rate is equal to the federal short-term rate plus an additional 3 percentage points, making it somewhat more punitive.

Short-term interest rates were close to zero for most of the time since 2013, but rose sharply in the past year or so. If you want a single number to represent the average rate for the whole period, you should take the rate for each of the intervening months or quarters, and calculate their geometric mean. (Or you could calculate the interest that would be earned in each period, and add it to the principal so it compounds in the following periods... That should give you the same final answer.)
posted by mbrubeck at 10:56 PM on March 29, 2023

Best answer: It is worth noting that quoted interest rates are quoted per annum unless stated otherwise. So for a debt of 100 and interest of 5% the amount of interest would be 5 for twelve months. If you owed the amount for a quarter it would only be 5/12*3=1.25.
posted by koahiatamadl at 11:46 PM on March 29, 2023

Response by poster: Your use of the term "restitution" suggests that this is a legal requirement for you...

nope, just a good term for 'pay back what is owed' i got from my AA pal.
posted by j_curiouser at 1:51 AM on March 30, 2023 [3 favorites]

Best answer: If you want to calculate payments on a loan with interest, you should search google for an amortization calculator.
posted by bCat at 3:56 AM on March 30, 2023

Best answer: Note that inflation alone between 2013 and 2023 means that \$100 is now worth \$129.14 (or goods that you could have bought with \$100 in 2013 will now on average cost \$129.14). Source: inflation calculator

If you want to make them whole, then an additional 30% is about right, if you want to go further then a further 20% (to make 50% more in total) in line with the IRS underpayment penalty is probably appropriate. If they are uncomfortable with you paying interest, I think you could reasonably insist on covering inflation.
posted by plonkee at 4:07 AM on March 30, 2023 [4 favorites]

Have you actually ever had an agreed repayment timeline or interest rate agreed with your lender? Unless your repayment is outside any timeline you had agreed, why would you apply interest rates that were designed to be punitive?

If they didn't care to stipulate an interest rate they clearly don't care. So 'making whole' becomes a gesture on your part. Somebody did you a good turn, you show appreciation. And a gesture can take many forms. Alternative to the loan would have been investing somewhere or parking the money. What were savings interest rate or fixed term deposits over the time of the loan? Start there. If I had lent you money I'd be extremely confused if you repaid me interest I did not request and then used some kind of punitive interest rate to come up with a number. I could have stipulated an commercial interest rate but chose not to.

Recognizing that they could have used their money in other ways/earned a return in some way, can be part of making whole. But I'd show appreciation in ways other than picking a higher rate - I'd use that money to take them out to a meal, gift tickets to a performance I know they'd enjoy or whatever. If this person cared about getting more cash they'd have structured this differently.
posted by koahiatamadl at 4:43 AM on March 30, 2023 [2 favorites]

I have been the recipient of such restitution and after a certain point it just felt like the other person was proposing to punish themself for something I had long since mentally written off as an inadvertent gift. I accepted the principal adjusted for inflation. What they may or may not have done with any calculated interest was then their own choice. Accepting it felt like it'd be benefiting from their struggles over the years that had resulted in not paying me back in the first place. Even though I hypothetically could have done "something" interest-bearing with the money during that time, I also might have lost it all in some spectacular fashion, so the most neutral option was the one that seemed fair to me.
posted by teremala at 5:33 AM on March 30, 2023 [5 favorites]

Use the concept of the "risk free rate" (what you could expect from the theoretically safest possible investment of that money, i.e., U.S. treasury bills), roughly adapted for your purposes. The average yield of a 10-year T-bill in 2013 was 2.35%. Use a compounding calculator to determine what that would be today.
posted by praemunire at 6:23 AM on March 30, 2023

Response by poster: appreciate everyones pov. thanks!

so, this effort is just getting off the ground. the person is in another state and I'm still trying to contact them. unlikely any kind of, "buy them dinner" is possible. the interest is not punative, or self-punishment. just trying to sort out a plainly fair value. i wouldn't impose on this person to determine the amount - that's on me. i'll present the dough, and listen to feedback if offered.

thanks again!
posted by j_curiouser at 11:39 AM on March 30, 2023

Well if its not a legal matter, another way to think about it might be, what would it cost today right now to buy/rent/replace/fix etc. for new right now in their state? That ties more to CPI rises not just interest. Assuming its not just cash of course.
posted by Lesium at 1:47 AM on April 3, 2023

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