How to Calculate Interest You Earn
When you earn interest on your savings, somebody pays you for letting them use your money. They "rent" your money and return it to you. You might deposit cash in your checking or savings account (essentially lending it to the bank), or you might make a loan to a business partner. Either way, knowing how to calculate interest helps you know what to expect in terms of earnings, and it helps ensure that you get paid everything you deserve.
An example may help show how to calculate interest on savings. You’ll need the following information:
- The amount of your deposit (or the amount you lend somebody)
- When interest is calculated and paid
- The interest rate
- How long you’ll earn interest
- You deposit $100 at the bank
- You earn interest annually, once per year
- The interest rate is 5% per year
- You’ll leave the money for one year
5% of $100 is $5, so you’d get an interest payment of $5 at the end of the year if you use a simple interest calculation. See the details on how to calculate simple interest for more details.
However, you need to verify how your bank calculates interest on savings accounts. It may be a simple interest calculation, but the rates you see advertised are most likely compound interest. If the rate is expressed as an annual percentage yield (APY), you’re dealing with compound interest. In that case, interest on savings is paid more frequently -- and each interest payment you earn goes on to earn more and more interest. See a visual example of how compound interest works.
If your interest rate -- but not the APY -- was 5%, you’d have more than $5 in earnings at the end of the year. On the other hand, if you are quoted an APY of 5%, you’ll have $5 in earnings at the end of the year (but the actual interest rate would be slightly lower).compound interest calculator to instantly find our how much interest your savings will generate.