How to Calculate Interest Earned on a Savings Account
Know how much you’re earning to better plan your savings goals.
Wondering how to calculate savings interest? Nowadays there are plenty of online monthly savings calculators that do the math for you. But learning to make sense of the numbers can help you understand the specifics of why you are receiving as much (or as little) as you are.
How do you calculate monthly interest earned on a savings account?
Calculating your monthly interest earned starts with knowing the basic equations for calculating interest:
Simple Interest: A = P x r x t
Compound Interest: A = P(1+r/n)nt
You may recognize the equation from high school algebra—remember when your teacher said you’d use it in real life some day? Well, today’s the day!
While it looks daunting, the equation uses variables that can easily be decoded. The variables are:
- P: your principal deposit, or the original balance of your account
- r: the interest rate of your account in decimal format
- n: the number of times your bank compounds interest in a year
- t: the time, in years, you want to calculate for
- A: the amount of money you’ll have in your bank account after interest is paid1
But before you break out your calculator, it may be helpful to understand the two different types of interest and how they can earn you money.
The two types of interest
While it may seem like a couple of pennies now, interest can add up over time. Those pennies turn into dollars, then into tens of dollars, and well, you get the rest. Whether you are a strict saver who doesn't touch a cent of their savings or a planner who likes to save for specific life events or goals, figuring out how to calculate monthly interest on a savings account starts with a basic understanding of simple and compound interest.
|Simple Interest 2||Compound Interest 2|
Simple interest is money earned on the original amount of your deposit.4 It doesn’t account for any interest you earn over time and will always be calculated based on your principal deposit, or the original amount of money deposited into your account, as long as you don’t add to or subtract from the principal balance. If you opened a savings account with $10,000 and had a monthly interest rate of 1%, you would have $10,100 in your account by the end of the month. The next month, you would have $10,200 because simple interest only earns you money on the principal balance of $10,000.
Compound interest calculates your interest using your principal balance plus any interest you’ve already earned over a certain amount of time. If your account is compounded daily, your bank will usually calculate your interest earned every day, and if your account is compounded monthly or annually, your bank usually will calculate your interest once per month or year.5 With this method, interest usually grows faster over time. If you opened a savings account with the same deposit and rate as the example above, you would also earn $100 in interest during your first month. But the following month, the bank would give you 1% of your new balance—$10,100. This would bring your total balance to $10,201.
Depending on your bank, your account may calculate and collect interest weekly, monthly or yearly. The more often your bank compounds, the more your balance will grow.
How much interest will I get on $1,000 a year in a savings account?
Generally, traditional savings accounts use compound interest6, so to calculate how much annual interest you’ll earn on $1,000 use this equation: A = P(1+r/n)nt
If you have an account with $1,000 that compounds monthly at a 1% interest rate, first you would identify all your variables:
A = the total amount you are trying to find
P = your principle amount of $1,000
r = your interest rate in decimal format 0.01 (divide 1 by 100)
n = your bank compounds monthly, so it would compound 12 times a year
t = you are looking to find your interest earned of 1 year
Then plug it into the equation: A = 1,000(1+ 0.01/12)(12 X 1)
And finally, type the equation into a calculator—or use a pencil and paper if you’d like—to get your total amount of $1,010.05.
While it may feel disheartening to see your interest is only $10.05, imagine what can happen over years of saving. If you’re looking for faster ways to save, other savings vehicles like money market accounts (MMAs) and certificates of deposits (CDs) may be a better fit for you.
Growing your savings over time
Learning how to calculate interest earned on savings is a process, and sometimes it’s just easier to have a compound savings calculator do the math for you. If you understand more about how interest works, managing your money can be easier.
This site is for educational purposes. The material provided on this site is not intended to provide legal, investment, or financial advice or to indicate the availability or suitability of any Capital One product or service to your unique circumstances. For specific advice about your unique circumstances, you may wish to consult a qualified professional.
Kagan, J. “Compound Interest” (February 9, 2019). Retrieved March 20, 2019, from: https://www.investopedia.com/terms/c/compoundinterest.asp
“Simple Interest Calculator,” financial-calculators. Retrieved March 10, 2019, from: https://financial-calculators.com/simple-interest-calculator
“Compound Interest Calculator,” financial-calculators. Retrieved March 10, 2019, from: https://financial-calculators.com/compound-interest-calculator
Pritchard, J. “Simple Interest: Overview and Calculations” (January 23, 2019). Retrieved March 20, 2019, from: https://www.thebalance.com/simple-interest-overview-and-calculations-315578
Pritchard, J. “How Compound Interest Works and How to Calculate It” (January 15, 2019). Retrieved March 20, 2019, from: https://www.thebalance.com/compound-interest-4061154
Adkins, W. “How Is the Interest Calculated for a Personal Savings Account?” (March 11, 2019). Retrieved April 23, 2019, from: https://smallbusiness.chron.com/interest-calculated-personal-savings-account-4075.html