How to Calculate Interest in a Savings Account - NerdWallet (2024)

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When you earn interest in a savings account, the bank is literally paying you money to keep your cash deposited there.

Savings accounts earn compound interest, which means the interest you earn in one period gets deposited into your account, and then in the next period, you earn interest on that interest. Calculating exactly how much interest your deposits earn over time requires accounting for compound interest — we’ll get into that later on — but you can start by getting a reasonably accurate estimate using the simple interest formula.

How to calculate interest in a savings account

You can calculate the simple interest you’ll earn in a savings account by multiplying the account balance by the interest rate by the time period the money is in the account. Note that the interest in a savings account is money you earn, not money you pay.

The formula for calculating simple interest is: Interest = P * R * T.

P = Principal amount (the beginning balance).

R = Interest rate (usually per year, expressed as a decimal).

T = Number of time periods (generally one-year time periods).Say you have a savings account with $10,000 that earns 4% interest per year. Expressed as a decimal, the interest rate is 0.04, so the formula would be:

Interest = $10,000 * 0.04 * 1, which equals $400.

Interest rates in the best savings accounts are above 4%. But other accounts earn much less. In fact, the national average savings rate is 0.46%. You can use NerdWallet’s savings calculator to figure out how much interest you could earn with different rates and time periods.

Here’s another example: If the $10,000 deposit is in an account that earns only 0.15% interest per year, the interest rate would be expressed as 0.0015. In this case, the calculation would be:

Interest = $10,000 * 0.0015 * 1.

Interest = $15.

Practically speaking, this formula is best for calculating roughly how much interest your money can earn in a savings account based on the principal balance.

To determine precisely how much interest you could earn in a savings account over time, you’ll want to consider the effect of compounding.

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Savings account simple interest vs. compound interest

If you're earning interest in a savings account, that interest will also earn interest over time. This process is called compounding, and your overall earnings will be a bit higher than what’s calculated with the simple interest formula.Suppose your account has earned $10 in interest. If you leave that extra bit of money in your account, it will also start earning interest during each compounding period (many online savings accounts compound daily). Compound interest helps your bank balance grow faster over time. The rate of compounded interest earned over a year is expressed as the annual percentage yield (APY). You will typically see savings account rates expressed as an APY.

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Today’s high savings rates may not last forever. Take advantage of them while you can with a federally insured high-yield savings account.

How much interest will I earn on $10,000?

Say you have $10,000 in a high-yield savings account that earns 4% APY, and you keep the money in the account for five years.

If interest is compounded daily, you’d earn about $2,214. Compare that with earning only simple interest and no compounding: Using the simple interest formula (Interest = $10,000 x 0.04 x 5), you can see that your simple interest would be $2,000.

With compound interest, you get additional money with no additional effort on your part. The higher the rate, the more your interest will grow. In addition, the more compounding periods there are, the more interest grows.

You can use NerdWallet’s compound interest calculator and select the compounding period (daily, monthly or annually) to determine how much you could earn in other scenarios.

You can know how banks calculate interest on savings accounts by understanding the compound interest formula. It’s more complicated than the simple interest formula, but it provides a more accurate result for saving money over time. However, the simple interest calculation is good for a quick estimate.

The compound interest formula

Here is how to compute monthly compound interest for 12 months: Use the formula A=P(1+r/n)^nt, where:

A = Ending amount.

P = Principal amount (the beginning balance).

r = Interest rate (as a decimal).

n = Number of times interest is compounded in a specific time frame.

t = Time frame.

How to Calculate Interest in a Savings Account - NerdWallet (4)

» Want to dig deeper? Read this primer on compound interest

Compound interest is a good way to have your money work for you, but you can really boost your savings if you take the additional step of making regular savings deposits. Additional deposits help you grow your account balance more than with interest alone. In the example above, say you deposit an extra $100 a month after the initial $10,000. In five years, you would have deposited an extra $6,000 ($100 * 12 months a year * 5 years = $6,000). But when compounded daily at 4% APY, your balance grows to about $18,845.

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How to Calculate Interest in a Savings Account - NerdWallet (5)

You don’t need to have $10,000 to take advantage of compound interest

Suppose you start with a $0 savings balance and make savings deposits on a regular basis. For example, say you set aside roughly $20 from each paycheck and then deposit $40 each month into your savings account. Since there are 12 months in a year, you would have deposited $480 ($40 * 12 months = $480). Continue doing that for five years, and you would have made $2,400 in deposits ($480 * 5 years = $2,400). But if that money is in a savings account that earns a 4% APY over the entire term, compounded daily, the account balance would be $2,652.

So your money would have earned you an extra $252 all from starting with zero and saving $40 a month on a regular basis.It’s worth noting that interest rates in savings accounts are variable and can change at any time. If you would like to deposit your money in an account with a fixed rate, consider a high-performing certificate of deposit.

How to earn more interest in a savings account

To earn more interest, you’ll need to put your money in an account with a strong interest rate. Many online banks tend to have savings accounts with above-average interest rates. Check out this list of the best high-yield online savings accounts to see how they compare.

How to Calculate Interest in a Savings Account - NerdWallet (2024)

FAQs

How to Calculate Interest in a Savings Account - NerdWallet? ›

How do you calculate interest on a savings account? You can calculate the amount of simple interest your account earns by multiplying the account balance by the interest rate for a select time period. To calculate compound interest, you'll need to add up interest earned over time.

How do you calculate interest on a savings account? ›

The formula for calculating simple interest is: Interest = P * R * T. P = Principal amount (the beginning balance). R = Interest rate (usually per year, expressed as a decimal). T = Number of time periods (generally one-year time periods).

How much interest will $5000 earn in a savings account? ›

How Much Can I Earn With a High-Yield Savings Account?
6 Months of Earnings at Different Savings Account Rates and Balances
Balance0.46% (national average)4.50% APY
$5,000$11.51$111
$7,500$17.27$167
$10,000$23.02$223
2 more rows
Mar 7, 2024

How is interest determined on a savings account? ›

Simple interest = Principal x Interest rate x Time period

Say you have $1,000 in a savings account with a simple interest rate of 2.00% APY. Using the formula, here's how much you'd earn: 1,000 x 0.02 x 1 = 20.

How much is $1000 worth at the end of 2 years if the interest rate of 6% is compounded daily? ›

Hence, if a two-year savings account containing $1,000 pays a 6% interest rate compounded daily, it will grow to $1,127.49 at the end of two years.

What is the formula for calculating interest amount? ›

Interest = Principal x Rate x Time.

A SI calculator or simple interest calculator online comes in handy and allows you to calculate simple interest in no time.

How do you calculate bank savings interest per month? ›

Simply divide your APY by 12 (for each month of the year) to find the percent interest your account earns per month. For example: A 12% APY would give you a 1% monthly interest rate (12 divided by 12 is 1). A 1% APY would give you a 0.083% monthly interest rate (1 divided by 12 is 0.083).

What is 5% interest on $1000? ›

$1,000 × 0.05 = $50 . That's it.

How much interest will $10,000 earn in a savings account? ›

Here's what your returns on a $10,000 balance could look like
0.46% APY5.30% APY
After 1 Year$46.00$530.00
After 5 Years$232.13$2,946.19
After 10 Years$469.64$6,760.37
Dec 30, 2023

How much is $10000 at 5% interest? ›

Simple Interest Examples

You want to know your total interest payment for the entire loan. To start, you'd multiply your principal by your annual interest rate, or $10,000 × 0.05 = $500.

How to calculate daily interest? ›

Multiply your principal balance by your interest rate. Divide your answer by 365 days (366 days in a leap year) to find your daily interest accrual or your per diem. 3. Multiply this amount by the number of calendar days that have elapsed since the date of your last payment to find your interest due.

How often do banks calculate interest on savings accounts? ›

Most banks pay interest monthly, but the compounding interval can vary. Just to name a few examples, Bank of America and Wells Fargo compound interest daily. Chase, on the other hand, compounds and pays monthly. The best way to find out how often your savings interest is calculated is to check with your bank.

How to calculate daily interest on savings account in Excel? ›

Below are the steps to perform:
  1. Divide your annual interest rate by 365 to get 1 day interest rate.
  2. So 3% / 365 days = 0.00822 (day's interest rate)
  3. Now since we have day's interest rate, we can easily calculate one day interest using below formula.
  4. Interest = Balance * Day's Interest Rate / 100 = Rs.

How much will $10,000 be worth in 20 years? ›

The table below shows the present value (PV) of $10,000 in 20 years for interest rates from 2% to 30%. As you will see, the future value of $10,000 over 20 years can range from $14,859.47 to $1,900,496.38.

How long will it take $4000 to grow to $9000 if it is invested at 7% compounded monthly? ›

Substituting the given values, we have: 9000 = 4000(1 + 0.06/4)^(4t). Solving for t gives us t ≈ 6.81 years. Therefore, it will take approximately 6.76 years to grow from $4,000 to $9,000 at a 7% interest rate compounded monthly, and approximately 6.81 years at a 6% interest rate compounded quarterly.

How much will I have if I save $10 dollars a day for a year? ›

How much of a difference could investing $10 a day make? Investing $10 a day can have a huge impact on your financial future because it has a snowball impact. The $10 a day adds up to $3,650 a year -- which is a pretty good sum of money. And, once you have invested that money, you get to benefit from compound growth.

How much interest will 10000 earn in a savings account? ›

Here's what your returns on a $10,000 balance could look like
0.46% APY5.30% APY
After 1 Year$46.00$530.00
After 5 Years$232.13$2,946.19
After 10 Years$469.64$6,760.37
Dec 30, 2023

How do you calculate interest per month? ›

For example, if you currently owe $500 on your credit card throughout the month and your current APR is 17.99%, you can calculate your monthly interest rate by dividing the 17.99% by 12, which is approximately 1.49%. Then multiply $500 x 0.0149 for an amount of $7.45 each month.

How much interest does 50k earn? ›

A sum of $50,000 in cash can earn about $195 a year in an average bank savings account or as much as $2,300 if you put it into a high-quality corporate bond fund. Other options include money market accounts, money market funds, certificate of deposits and government and corporate bonds.

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