What Is Interest Earned on Savings?

How to Calculate Simple Interest Earned on Savings

To calculate interest earned on savings for one period, you'd use this formula:

• Interest = Principal x Rate x Number of Periods

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.

To calculate the interest earned from your savings account, gather the following pieces of information:

• Principal: This is your account balance at the amount you lend to the bank.
• Interest payment frequency: This is how often the bank pays you interest (yearly, monthly, or daily, for example).
• Interest rate: This is the percentage that the account pays you.
• Term: This is the overall length of the loan. You'll need to convert months to years for this variable. For example, one month is .083 years, two months equals .167 years, and 18 months equals 1.5 years.

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.

How to Calculate Compound Interest on a Savings Account

To calculate compounding interest, use this formula:

Where the variables are:

• A = the total value in the future
• P = the initial deposit
• r = the interest rate
• n = the number of compounding periods
• t = the number of periods that have passed or will pass

To calculate compound interest on a savings account, you need to consider two aspects:

• More frequent periodic interest payments: Many interest-bearing accounts pay interest more than once per year. For example, your bank might pay interest monthly.
• An increasing account balance: Any interest payments will alter subsequent interest calculations.

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:

1. A = $100 [ 1 + (.05 ÷ 12) ] 12 * 1
2. A = $100 [ 1 + ( .004167 ) ] 12
3. A = $100 [ 1.004167 ] 12
4. A = $100 [ 1.0512 ]
5. A = $105.12

In this example, your account earned $5.12.

Accounting for Ongoing Savings With Deposits

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:

• FV = the future value of your account with deposits and compounding interest
• Pmt = the monthly payment amount
• r = the monthly interest rate (divide the annual rate by 12)
• n = the number of months
  
  Here's the formula for a series of identical periodic deposits over a five-year period:

1. FV = $100 x [ { ( ( 1 + 0.004167 ) ⁶⁰ ) – 1 } ÷ 0.004167 ]
2. FV = $100 x [ { 1.283 – 1 } ÷ 0.004167 ]
3. FV = $100 x 68.0067
4. FV = $6800.68

How to Calculate Interest Earned on Savings In a Spreadsheet

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:

That formula asks for the following items, separated by commas:

• Interest rate (5% in the example)
• Number of periods (interest is paid once per year)
• Periodic payment (this simple example assumes you won't make future deposits)
• Present value ($100 initial deposit)

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.

Extra Steps for Compounding Scenarios

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:

You'd end up with $6,800.68 after five years.

Calculating Annual Percentage Yield

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:

1. APY = ( 1 + (.05 ÷ 12 ) ) 12 - 1
2. APY= ( 1 + .004167 ) 12 - 1
3. APY = ( 1.004167 ) 12 - 1
4. APY = 1.0512 - 1
5. APY = .0512 or 5.12%
   
   

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.

Frequently Asked Questions