Guide to Calculating the Interest Earned in a Savings Account

Putting your money in a savings account may help you accumulate more money through interest. But how banks calculate interest may be mysterious, especially when they use terms such as simple or compound interest. 

Keep reading to learn how to calculate interest on a savings account, simple interest vs. compound interest, and tips for how you may earn even more.

What Is Interest Earned on Savings?

A key differentiator between a savings account and a checking account is that you earn interest on a savings account. Generally, the interest rate is low, though it varies from one bank to another. Currently, the average interest rate on a savings account is 0.38%, but some online banks and credit unions offer interest rates as high as 4.40% in an effort to attract new customers.

Before you look at how to calculate the daily or monthly interest rate on a savings account, it helps to understand the two types of interest.

Simple Interest vs Compound Interest

Simple interest refers to interest earned on the money you deposit. If you have $1,000 in the bank and it earns 1.00%, you get $10 in interest. Simple interest doesn’t take into consideration interest earned over time.

That’s where compound interest comes in. This pays a percent on not just your deposits but also on the interest you’ve already earned. So that $1,010 you have? You earn interest on the whole thing, not just the initial $1,000 deposit. If you open a savings account today, you’re likely to earn compound interest. 

Compound interest is paid according to the bank’s compounding period. That might be daily, monthly, quarterly, or annually. The longer you keep money in your account, the faster you typically earn interest. That’s because you’re earning interest on all your previous interest in addition to your deposit.

Calculating Simple Interest on a Savings Account

Here’s how to calculate simple interest on a savings account:

A = R × T × P

• A = Amount of interest

• R = Rate

• T = Time period

• P = Principal (your account balance)

Using the example above, take that $1,000 deposit and look at interest over one year at 1.00% interest:

A = 0.01 (interest) × 1 (year) × 1,000 (principal)

A = $10

You earn $10 in interest with $1,000 in a savings account that earns 1.00% interest over a year.

Calculating Compound Interest on a Savings Account

You may modify the simple interest formula to calculate compound interest, but you need to know the compounding period:

A = P(1 + R/N)^NT

• A = Amount of interest

• R = Rate

• T = Time period; in this case, one year

• P = Principal (your account balance)

• N = Compounding period (in this case, 12 times a year)

Say your bank pays interest every month. Your N would be 12 since you get paid interest 12 times a year.

A = 1,000(1 + 0.01/12)^12×1

A = $1,010.05

Your compound interest is $1,010.05.

At first, there isn’t a big discrepancy between what you get with simple interest ($1,010) and compound interest ($1,010.05). But over time and as you invest more, there may be a greater rise in what you earn with compound interest. 

Learning how to calculate the interest rate on savings accounts is helpful because it allows you to estimate how much you may have in the future. 

Recommended: How Much the Average American Has in Savings

Calculating Interest With a Spreadsheet

You could calculate interest on savings accounts by setting up the formula for compound interest in a spreadsheet. There are even functions built into both Excel and Google Spreadsheets that allow you to plug the numbers into the formulas above to get your interest.

If you’re saving for something in particular, a spreadsheet may help you project how long it’s likely to take to have enough set aside, including interest. 

Calculating Annual Percentage Yield

As you’re learning how to calculate interest on a savings account, you might assume that the higher the interest rate offered on an account, the better, right? Well, that’s not always the case. Because banks pay interest on different compounding schedules, the amount you could earn over a year may vary.

Look at the same interest rate of 1.00% on a $1,000 investment compounded daily, monthly, and quarterly to determine the differences. Here’s the formula to calculate annual percentage yield (APY):

APY = (1 + R/N)^N – 1

• R = Interest rate

• N = Number of times the interest is compounded per year

For daily compounding:

APY = (1 + 0.01/365)³⁶⁵ – 1 

Your daily compounded interest is $1,010.05.

For monthly compounding:

APY = (1 + 0.01/12)¹² – 1

Your monthly compounded interest is $1,010.05.

For quarterly compounding:

APY = (1 + 0.01/4)⁴ – 1

Your quarterly compounded interest is $1,010.04

Again, there doesn’t seem to be much variance among these, but the more money you save (try this formula with $1 million) and the longer you save it (substitute 10 years), the bigger the difference you may see.

Keep in mind that these formulas don’t work for brokerage accounts.

Where You Can Find the Interest Rate on Your Savings Accounts

If you’re looking to open a savings account, the bank or credit union website should list the interest rate. Dig deeper to determine the compounding period so you’re able to calculate the compound interest and APY accordingly. 

And pay attention: Some banks offer different interest rates depending on how much money you’re depositing.

Recommended: How to Transfer Money Between Banks

Ways to Earn More Interest With a Savings Account

Ways you may earn more interest with a savings account include:

• Choose a high-yield savings account: Opt for an online or high-yield savings account that offers competitive interest rates.

• Compare interest rates: Regularly check different banks and credit unions for better rates.

• Maintain a higher balance: Some banks offer higher interest rates for larger balances.

• Set up automatic transfers: Consistently adding funds may help grow your savings and maximize interest earnings.

• Look for promotional offers: Some banks offer bonus interest rates for new customers or specific deposit amounts.

• Avoid withdrawals: Keeping funds in your account longer allows interest to compound over time.

• Consider a money market account: These accounts often provide higher interest rates while still offering liquidity.

• Use certificates of deposit (CDs): If you don’t need your money immediately, CDs may offer higher fixed interest rates.

• Check for rate increases: Some banks periodically adjust interest rates, so staying informed may help you switch to a better option.

The Takeaway

Knowing how to calculate interest on a savings account empowers you to be a smarter saver. Calculating simple interest may be done in your head, whereas compound interest requires a calculator. Understanding simple vs. compound interest could help you plan and save for big purchases. 

If you’re looking to earn a competitive rate on your savings account, Lantern by SoFi can help. With our online banking marketplace, it’s easy to compare high-yield savings accounts based on APY, fees, and balance minimums.

Compare today’s high-yield savings rates, including fees and balance minimums.