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Guide to Calculating the Interest Earned in a Savings Account

Calculating Interest on a Savings Account
Susan Guillory
Susan GuilloryUpdated February 22, 2023
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Putting your money in a savings account can help you accumulate more money through interest — that much we all know. But how banks calculate interest can be mysterious, especially when they use terms like simple or compound interest. We’ll explain how anyone can calculate the interest on their savings account, and explore some tips for how you can earn even more.

What Is Interest Earned on Savings?

A key differentiator between a savings account and a checking account is the interest you earn on savings. Generally, the interest rate is low, though it varies from one bank to another. Currently, the average interest rate on a savings account is 0.19%. But some online banks and credit unions offer interest of 6% or more, in an effort to attract new customers.Before we 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%, you’ll have $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’ll earn interest on the whole thing, not just the initial $1,000 deposit. If you open a savings account today, you’ll most likely 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’ll 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

How to calculate simple interest on a savings account is, well, pretty simple.A = R x T x P
  • A = amount of interest
  • R = rate
  • T = time period
  • P = principal (your account balance)
Using the example above, let’s take that $1,000 deposit and look at interest over one year at 1% interest:.01 interest x 1 year x 1,000 principalDid you do the math? The answer is $10 interest.By the way, the same formula applies to checking and savings accounts, as long as the account is interest-bearing.

Calculating Compound Interest on a Savings Account

We can modify the simple interest formula to calculate compound interest, but we need to know the compounding period.A = P(1 + R/N)NT
  • A = amount of interest
  • R = rate
  • T = time period; in this case, 1 year
  • P = principal (your account balance)
  • N = compounding period (in this case, 12 times a year)
Let’s say your bank pays interest every month, so your T would be 12, since you get paid interest 12 times a year.1,000(1 + .01/12)12x1Your 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, as you invest more, there will be a greater rise in what you earn with compound interest. Learning how to calculate the interest rate on savings accounts is helpful because you can estimate how much you’ll have in the future. Recommended: How Much the Average American Has in Savings

Calculating Interest With a Spreadsheet

This section is for the spreadsheet and data geeks out there. You can easily 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 in the numbers to the formulas above to get your interest.If you’re saving for something in particular, a spreadsheet can help you project how long it will 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 can earn over a year will vary.Let’s look at the same interest rate of 1% on a $1,000 investment compounded daily, monthly, and quarterly to see the differences. Here’s the formula to calculate annual percentage yield:APY = (1 + R/N)N – 1
  • R = interest rate
  • N = number of times the interest is compounded per year
For daily compounding:(1 + .01/365)365- 1 Your daily compounded interest is $1,010.05.For monthly compounding:(1 + .01/12)12- 1Your monthly compounded interest is $1,010.05.For quarterly compounding:(1 + .01/4)4- 1Your quarterly compounded interest is $1,010.04Again, 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’ll see.In case you were wondering, these formulas don’t work for brokerage accounts, which are a whole other thing.

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 find out the compounding period so you can 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

Now that you know how to calculate interest on savings accounts, let’s explore how you can earn even more.Start by comparing interest rates at different banks. There’s no reason you need to open a savings account with the bank you already have a checking account with, especially if it offers a low interest rate. Online banks tend to offer higher rates, so explore those. Also, look at opening a high-yield savings account. These may have minimum deposit requirements, and tend to be better for short-term savings. Money market accounts are another option. These are like a cross between a checking account and a savings account: You can pay for purchases using the account, but it also earns interest.

The Takeaway

Knowing how to calculate interest on a savings account empowers you to be a smarter saver. Calculating simple interest can be done in your head. Compound interest requires a calculator. Or you can use the Formula function in Excel or Google Spreadsheets to pull up “Compound Interest” and plug in your own numbers for Principal Amount, Interest Rate, Compounding Period, etc. Understanding simple vs. compound interest can help you plan and save for big purchases. Which savings account offers the best interest and perks? Lantern can help you find the right savings account for your needs. Compare today’s high-yield savings rates, including fees and balance minimums.

Frequently Asked Questions

How is savings account interest calculated?
What interest rate is considered good for my savings account?
What should I do to earn more interest on my savings account?
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About the Author

Susan Guillory

Susan Guillory

Su Guillory is a freelance business writer and expat coach. She’s written several business books and has been published on sites including Forbes, AllBusiness, and SoFi. She writes about business and personal credit, financial strategies, loans, and credit cards.
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