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Peggy James is an expert in accounting, corporate finance, and personal finance. She is a certified public accountant who owns her own accounting firm, where she serves small businesses, nonprofits, solopreneurs, freelancers, and individuals.
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Interest earned on savings is the money earned when you place it in a savings account. It's important to know how to calculate it, so you can compare the savings accounts from different banks and find the one that will work for you while it helps your money grow.
To calculate interest earned on savings for one period, you'd use this formula:
For example, if your savings account paid 5% interest once a year and you placed $100 in it, you'd calculate the interest as $100 x .05 x 1 = $5.
The interest you've earned on your savings is paid because your bank borrows money from you when you place it in your savings account; it also acts as an incentive to keep your money in a savings account.
There is no insidious intent behind a bank using your money in this way; it is used to create loans for other customers and keep money flowing through the economy. The bank also makes money because it charges other people more interest than it pays you.
To calculate the interest earned from your savings account, gather the following pieces of information:
Once you have the information, you can plug it into the simple or compound interest formulas to figure out the interest earned on your savings. For example, the interest you earn on your savings in one period is simple interest.
To calculate compounding interest, use this formula:
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Where the variables are:
To calculate compound interest on a savings account, you need to consider two aspects:
Here, you add the assumption that your bank pays interest, which compounds monthly. Use this compound interest formula to calculate the ending amount after one year (A).
If you were to deposit $100 in your savings account that compounds monthly for one year, you'd calculate it like this:
In this example, your account earned $5.12.
For a quick answer or to check your calculations, you can use a compound interest calculator. Your results may differ when you use the online calculator.
The examples above assume you make a single deposit, but that's rarely how people save. It's more common to make small, regular deposits into a savings account. With a little adjustment to the formula, you can account for those additional deposits.
Everything in the following examples will remain the same as the monthly compounding equation above, but instead of an initial deposit of $100, assume you start at $0 and plan to make monthly deposits of $100 over the next five years.
To calculate by hand, you use the future value formula. In this equation:
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Spreadsheets can automate the process and allow you to make quick changes to your inputs.
To calculate your interest earnings with a spreadsheet, you'll need to use the future value function. The future value is the amount your asset will be worth at some point in the future, based on an assumed growth rate. Microsoft Excel and Google Sheets (among others) use the code “FV” for this formula.
To make a spreadsheet from scratch, start by entering the following in any cell to figure your simple interest earnings:
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That formula asks for the following items, separated by commas:
The formula above shows simple interest (not compound interest), because there is only one compounding period (annual). Because of spreadsheet programming and accounting concepts, you'll need to enter your payment as a negative number to get a positive number on the sheet.
For a more advanced spreadsheet, enter the rate, time, and principal in separate cells. Then you can refer to those cells from your formula and easily change them for different situations.
To use this spreadsheet formula for an account with compounding interest, you need to adjust several numbers. To change this annual rate to a monthly rate, divide 5% by 12 months (0.05 ÷ 12) to get 0.004167. To calculate monthly compounding over multiple years, you’d use 12 periods per year. For example, five years would be 60 periods.
In this case, your spreadsheet formula would look like this:
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You'd end up with $6,800.68 after five years.
As the equation demonstrates, monthly compounding increases your annual returns. When you open your savings account, you'll generally get an interest rate quoted as the annual percentage yield (APY). Most banks advertise APY for interest-bearing accounts because the number is usually higher than the "interest rate"—it's also easy to work with because it accounts for compounding. However, it doesn't take regular contributions into account, so it's best used for finding out how much one deposit will be worth at the end of one year.
Even though the interest rate in both examples is 5%, the APY in the compounding example is 5.12%, calculated like this:
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The APY is higher than the stated annual rate when banks pay interest more often than annually. The APY tells you exactly how much you’ll earn over a year, without the need for complicated calculations—you simply multiply your principal by the APY to get the interest earned on savings.
If you place $1,000 in your savings account which has a .01% APY, you'll have a total of $1,000.10 in one year.
You calculate simple interest using the formula Interest = P x R x N, where P is the beginning balance, R is the interest rate, and N is the number of periods. The interest is paid at the end of the period.
To calculate interest per month, you use the simple interest formula: Interest = P x R x N, where P is the balance, R is the interest rate, and N is the number of periods.
