October 29, 2024

How to Calculate Savings Account Interest

Calculate-Interest-on-Savings-Account
When the bank deposits interest into your savings account each month, you probably smile and move on. But, since the interest calculations are automatic, you might not know how much to expect.
To really get a hold of your financial future, it’s helpful to know how to calculate interest on a savings account. That way, you’ll better anticipate your earnings and feel confident knowing how much will end up in your account at the end of every month, year, or even decade.
Here’s how to calculate savings interest, plus tips on making the most of your savings account.

How does savings account interest work?

Before you can calculate interest, you have to know how it works. If you borrow money, by taking out an installment loan for instance, the interest is the cost of borrowing that money. Loans have an annual percentage rate, or APR, which is the rate you’re paying interest each year. But when you put money in a savings account, the bank is borrowing money from you. Your interest rate is how the bank rewards you for lending them that money.
So, when you deposit money into a savings account, the bank pays you interest. You earn a certain percentage of money after a set amount of time, based on the account’s Annual Percentage Yield, or APY, and how much money you have in that account. For example, if your savings account has an interest rate of 1% and you deposit $100, you’ll earn $1 at the end of the period.
Interest is a percentage of your deposited amount, also known as the principal amount — so the higher your initial deposit, the more interest you’ll earn. Your returns also depend on the type of interest and the rate you’re earning, which most banks present as the APY.
Here’s more about these two key terms:
Imagine you deposit $1,000 (your principal amount) into a savings account with an APY of 3%. Because 3% of $1,000 is $30, you can expect to earn $30 in interest. These calculations get more complicated depending on what type of account you have, but this is a basic example to help you see how APY affects your savings.

How to calculate monthly interest in a savings account

You don’t need to know how to do the math to figure out your interest rate. There are tons of online calculators out there that can do the work for you. But understanding how to calculate the monthly interest on your savings is helpful if you want to know more about how interest works.
For both types of interest, the first thing you need to do is know your principal and your APY. You’ll have to convert the APY percentage into a decimal. For example, 5% becomes 0.05. You can do this by simply dividing the number (5) by 100.
You’ll also need to know what each letter in the formulas represents:
If you’re calculating simple interest, use this interest formula: P x APY x T.
If you’re calculating compound interest, use this formula: P x (1 + APY / N)(NT).
Here’s an example calculation for compound interest. If you have $1,000 in a savings account with an APY of 5% compounded monthly, and you want to calculate it for the year, your formula would look like this: $1,000 x [(1 + 0.05 / 12)(12 x 1)] = $51.16. So, you'd earn $51.16 in interest for that year.

Types of interest

Interest on savings accounts come in two main types: simple and compound. Each type has its own features and benefits:

Simple interest

Simple interest is a straightforward way of calculating interest. It's based solely on the principal amount and doesn’t consider any interest accumulating over time. The example we gave above was a simple interest calculation — you put $1,000 in an account with 3% interest, and you’ll have $1,030.
The main benefit of simple interest is its predictability. It's easier than compound interest to calculate and understand, making it a good choice for short-term savings where you want a clear view of your earnings. But it might not be the best for long-term savings since it only calculates the interest once instead of compounding on itself many times — which is what compound interest does.

Compound interest

Compound interest is the interest that you earn on the interest you make and your account balance. Instead of considering only your principal amount, it calculates interest both on the principal amount and the accumulated (compounded) interest over previous periods. This means the interest you earn each period adds to your principal, forming a new base for the next calculation.
The biggest advantage of compound interest is the potential for exponential savings growth. The more frequently the interest compounds — daily, monthly, quarterly, or annually — the greater your total is, making it an excellent option for long-term savings goals. But compound interest calculations can be more complex than simple interest, so it’s harder to predict how much you’ll earn over time.

How much interest does a savings account earn?

The interest you earn on your savings varies based on several factors, including the financial institution, type of account, and current economy. Here's what you need to know:

Average interest rates

According to 2023 data, the national average interest rate for savings accounts hovers around 0.05% APY. But don’t let the zeroes fool you. Many online banks and financial institutions offer higher rates than this average, especially for high-yield savings accounts, which could offer 5% APY or even higher.

How to use a savings account calculator

Savings account calculators, including those specifically designed as high-yield savings account calculators, can do the math for you. They’re great tools if you want to calculate interest fast, especially when you’re comparing different savings accounts and APYs.
Each calculator is different, but here’s a general guide to using one:
1. Enter your initial deposit. This is the starting amount in your high-yield savings account.
2. Input your monthly contribution. If you plan to regularly add money to your account, specify the amount here.
3. Determine the APY. This is the bank’s interest rate for the account. Remember, high-yield accounts typically offer rates much higher than standard savings accounts.
4. Select compounding frequency. Savings accounts often compound interest monthly or annually. Choose the frequency that matches the account you’re looking at.
5. Specify the period. Indicate how long you plan to keep your money in the account. Usually, the calculator will ask you to do this in years.
6. Review the results. After inputting all the necessary details, the calculator will provide an estimate of your total savings — including the interest earned — at the end of the specified period.

How to choose a savings account

Before opening any kind of savings account — standard or high-yield — think about your financial goals. Do you want to save up long-term for retirement, or do you want to buy a car or home within a few years? Once you know what you’re in it for, you can decide on an account that matches those needs. For example, a high-yield account with compound interest seems like a good idea for long-term saving, but it could have high fees that add up over time, making it a better choice for short-term goals.
Here are more factors to look at:

Use EarnIn to access your money faster

A high APY can earn you lots of interest over time. But if you need to access money in the short term and don’t want to take it out of savings, EarnIn’s here to help.
With EarnIn’s Cash Out tool, you can access your paycheck as you work instead of waiting days and weeks. You can get up to $150/day and up to $750/pay period with no credit checks, no interest, and no mandatory fees. On top of that, our Tip Yourself tool is a great way to automatically save small amounts regularly, creating better saving habits.
Download EarnIn to make moves toward your financial goals and make every day payday.
Please note, the material collected in this post is for informational purposes only and is not intended to be relied upon as or construed as advice regarding any specific circumstances. Nor is it an endorsement of any organization or services.
1. EarnIn is a financial technology company, not a bank. Subject to your available earnings, Daily Max and Pay Period Max. EarnIn does not charge interest on Cash Outs. EarnIn does not charge hidden fees for use of its services. Restrictions and/or third party fees may apply. For more info visit earnIn.com/TOS.
2. Tip Yourself Account funds are held with Evolve Bank & Trust, member FDIC and FDIC insured up to $250,000. Tip Yourself is a 0% Annual Percentage Yield and $0 monthly fee service. Your Tip Yourself Account and any Tip Jars are not Savings Accounts. For more information/details visit https://www.earnin.com/evolve-bank-and-trust

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