How to Calculate Interest for a Savings Account
When you put your money into a savings account, it isn't just sitting there. It grows, thanks to interest.
But it’s not just the interest rate that you need to look out for. You also need to pay attention to how often that interest is compounded. (Spoiler: the more frequently it compounds, the better.)
How does interest build?
So, first things first: Interest is the money you can earn on your savings account's balance. It’s the cash you earn for letting a financial institution use your money until you need it and it is expressed as a percentage.
Interest is usually added to your account, or compounded, daily, monthly, quarterly or annually, depending on the account. The rate at which interest compounds affects how fast your money grows. When interest compounds daily, it’s added to your account more often, so your savings grow more, too.
Explaining compounding interest
Compounding interest is essentially earning interest on your interest. The interest you earn is added to your balance, so when the interest compounds again, you earn interest on a slightly larger balance.
All things being equal, a savings account that compounds interest could earn you more interest than a savings account with simple interest. Learn more about compounding interest here.
How much interest you earn after one year assuming no funds are withdrawn, including all compounding interest, is the APY, or annual percentage yield. When shopping around for a savings account, APY is a good number to use to compare accounts. It gives you a holistic view of how much you could earn on your balance over the course of a year. If you see only the interest rate, you may want to look a little closer to find the APY.
Take a look at how much $10,000 can grow depending on how often the interest compounds.
- With 2% interest compounding annually $10,000 could grow to $12,190 in 10 years.
- With 2% interest compounding quarterly $10,000 could grow to $12,208 in 10 years.
- With 2% interest compounding daily $10,000 could grow to $12,214 in 10 years.
2% interest compounding annually
2% interest compounding quarterly
2% interest compounding daily
|
2% interest compounding annually |
2% interest compounding quarterly |
2% interest compounding daily |
|
|---|---|---|---|
|
Initial Deposits |
$10,000 |
$10,000 |
$10,000 |
|
Compounding Period |
10 years |
10 years |
10 years |
|
Ending Balance |
$12,190 |
$12,208 |
$12,214 |
What affects how much interest you earn?
A bunch of factors determine how much interest you earn on your compound interest savings account, including:
- Initial Deposit – how much you start with determines how much interest you earn off the bat
- Interest Rate – the percentage a bank pays you on funds deposited in a particular account.
- Compounding Period – the more often you earn interest, the faster your money could grow
- Deposits – Recurring deposits mean you’re not only saving more, but earning interest on a larger balance
- How Long – the longer you keep your money in the account, the more opportunities it has to grow
Also remember, the interest rate on savings accounts could change from time to time and that impacts how much you’re earning. Though banks set their own rates, rates also tend to change when the Federal Reserve raises or lowers the federal funds rate.
How to calculate interest on a savings account
There are online compounding interest calculators to help you figure it all out. That’s a simple way, but you can also calculate interest in a savings account yourself by using a spreadsheet like Microsoft Excel or Google Sheets.
In Excel, you’d enter the following formula: =P*(1+r)^n.
P is the balance in your account, r is the interest rate for one compounding period, and n is the number of compounding periods over which you’re earning interest.
If you want to learn more, try out our savings calculator to see how much interest you could earn with a Marcus Online Savings Account compared to the national average.
Try our savings calculator to see how much your money could grow with an Online Savings Account.
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