How To Calculate Interest on Savings Account Funds
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Summary:
Stashing your funds in a savings account can help you build financial stability, and calculating how much interest you’ll earn on these savings can motivate you to build a habit of saving regularly. Interest earned on a savings balance can be calculated using one of a number of formulas, which will depend on the type of interest the account earns as well as the frequency at which you deposit funds into the account.
It’s common knowledge that saving money is one of the most important moves you can make for your financial health. But where you save your money can have a big impact on your financial future. If you want to stash your money somewhere safe and easily accessible, a savings account is a good choice.
To calculate how much interest you can earn on your savings balance, you need to know the account’s interest rate, the principal deposit, and how long the money will sit in the account (plus the number of compound periods, if the interest is compounding). Let’s take a closer look at how to calculate interest on savings account funds.
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How interest accrues in a savings account
Before you choose a savings account to deposit your money in, it helps to know how much interest you can expect to earn on those savings over a given period of time.
Depending on the financial institution, savings account interest can either be simple or compounding. Simple interest is earned only on the principal balance in the account. Compound interest, on the other hand, is earned on the beginning balance plus interest accumulated in the account over time, calculated over predetermined compounding periods.
To help you calculate how much interest you can earn on your savings balance, let’s go over the different formulas for simple interest and compound interest.
How to calculate simple interest on savings accounts
Between the two different types of interest, simple interest is considerably easier to calculate. Because the simple interest formula does not take accumulated interest into account, you only need to know your principal balance, the account’s interest rate, and the time period during which the money will remain in the savings balance.
The simple interest formula is calculated as follows:
For example, imagine you deposit $1,000 into a simple-interest savings account with a 3% annual interest rate. To calculate interest earned in one year, you would use the following formula:
Interest = $1,000 x 0.03 x 1 = $30
So in this case, you would earn $30 in simple interest over the course of one year.
Pro Tip
Although most savings accounts accrue compound interest, the simple interest formula serves as a quick and easy way to calculate some of your potential interest earnings on an initial savings balance.
How to calculate compound interest on savings accounts
Unlike the simple interest formula, the compound interest formula does take accumulated interest into account. Because any interest accrued on the savings account will in turn earn interest of its own, the formula to calculate compound interest is slightly more complex.
The compound interest formula is calculated as follows:
Continuing from the previous example, imagine you still deposit $1,000 into a savings account with a 3% interest rate, but this time the interest compounds on a monthly basis. To determine how much your savings balance will be after one year, you would use the following formula:
Final balance = $1,000 x (1 + 0.03/12)^12 x 1 = $1,030.42
In this scenario, you would have $1,030.42 in your savings account at the end of the year. As you can see from these examples, compound interest helps your money grow faster over time.
How to calculate interest when saving over time
So far, we’ve gone over the formulas you would use to calculate how much interest your savings would earn if you left the money untouched in your account and didn’t make any additional deposits for the entire time period. Realistically, however, you likely intend to make regular deposits to your account over time to help your savings grow faster.
If you deposit money into your account at regular intervals, here’s how you would calculate the future value of your savings:
In this case, FV represents the future value of your account when both deposits and compounding interest are considered, Pmt represents the monthly amount you add to the savings account, r represents the monthly interest rate, n represents the number of compounding periods, and t represents the time in years.
For example, imagine you plan to make monthly deposits of $100 each to a savings account with a 3% interest rate. The interest in the savings account also compounds on a monthly basis. You would then calculate your balance after one year as follows:
Future value = $100 x [(1 + (0.03/12)^12) – 1] / (0.03/12) = $1,216.64
At the end of the year, you would have $1,216.64 in your savings account.
How to maximize your interest earnings to reach your savings goals
While saving money at all is important, you’ll want to make sure you keep your savings in an account that will give you the best returns. Most savings accounts already earn compound interest, so you should search for the best annual percentage yield (APY) to figure out which bank pays the most interest on a savings account over the long term.
High-yield savings accounts have higher interest rates than regular savings accounts. As of late 2022, the FDIC reports the average national deposit rates for savings accounts are around 0.21%, while high-yield savings accounts typically offer APYs above 2%.
When shopping around for savings accounts, make sure you pay attention to the APY and the type of interest earned so you can get the most out of your savings!
FAQ
What is the formula for interest calculation?
The formula to calculate simple interest is Interest = P x R x T. In this equation, P represents the principal amount, R represents the interest rate, and T represents the number of time periods elapsed.
How is interest calculated on a savings account?
To calculate simple interest earned on a savings account, you would multiply the account balance by the interest rate and the number of time periods elapsed. To calculate compound interest earned, you would also factor in the number of times interest is compounded in a given time period.
Which bank gives a 7% interest rate on savings accounts?
Although interest rates are on the rise, savings accounts with interest rates as high as 7% are not currently available in the U.S. However, you can still get a good rate with a high-yield savings account, which has a much higher interest rate than the national average.
How do I calculate interest earned per month?
If the interest rate (R) in the formula you’re using is measured in years, then you would adjust the time period (T) to 1/12, or about 0.83.
How do I calculate interest earned per year?
Continuing from the above example with an interest rate (R) measured in years, you would simply calculate the formula using a time period (T) of 1.
How can I earn more interest on my savings account?
The best way to earn more interest on a savings account is to open an account with a high annual percentage yield and compounding interest, then make regular deposits into your savings balance.
What is a good interest rate for a savings account?
Interest rates on savings accounts will vary over time and across financial institutions, but in general, a good interest rate is 20 to 25 times the national average across standard savings accounts. Accounts that come with these higher rates are known as high-yield savings accounts.
Summary
Everyone knows that saving money is important. But finding the motivation to save is often difficult. One way to boost your motivation is by calculating the interest you could earn through a savings account. You can run these numbers by hand or take advantage of a free online calculator.
Key Takeaways
- You can earn one of two types of interest on a savings account: simple or compound. Simple interest accrues solely on the principal amount in the account, while compound interest accrues on both the principal balance and all subsequent interest earnings.
- Compound interest helps your money grow faster than simple interest, which is why most financial institutions offer savings accounts with compounding interest.
- High-yield savings accounts offer better interest rates than regular savings accounts, helping the money earned on an account to grow even faster.
- When searching for a savings account, choose one with a high APY and compounding interest to get the best returns on your savings.
Interested in opening a high-yield savings account but not sure where to start your search? SuperMoney has you covered! Use our comparison tool to compare APYs and find the best savings account for your needs!
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