How To Calculate Interest in a Savings Account
The average savings account annual percentage yield in April 2023 is only 0.39%. This number includes low interest rates from traditional banks as well as higher savings rates from online banks and neobanks like Varo Bank, which offers up to 5% APY on savings.
Even if you have a traditional bank account like Chase, which only offers APY, you might want to stash some of your savings in an FDIC-insured neobank such as Varo or an online bank like UFB Direct. These options offer some of the best savings account interest rates you’ll find, plus no monthly maintenance fees.
See: How To Guard Your Wealth From a Potential Banking Crisis With Gold
With interest rates this high, you might want to figure out exactly how much you can earn with a high-yield savings account. Calculating interest earned can encourage you to save even more as you watch your money grow.
What Is Interest on a Savings Account?
Interest is the money the bank or financial technology company pays you for keeping your savings with them. When you place money in a savings account, the bank lends that money out to earn profits and keep money circulating through the economy. The bank pays you a small percentage as an incentive to keep your money in a savings account with them.
The bank holds enough reserves to cover withdrawals, so your money is always available. And, if for some reason the bank experiences a “bank run,” where a lot of customers withdraw money at the same time, your money is FDIC-insured by up to $250,000 per accountholder, per account.
What’s the Difference Between Compound and Simple Interest?
There are two types of interest payments: simple and compound. If you are earning simple interest, you earn interest on the money you deposited, known as the principal. You do not earn money on the interest that accrues.
However, most banks and neobanks pay compound interest. When interest is compounded, the interest you earn gets added to the principal. The next time you are calculating saving account interest, you will include the interest already earned.
Interest may be compounded daily, weekly, or monthly. If interest compounds daily, your savings will continuously grow, leading to higher returns from your savings account.
Tips for Calculating Interest Earned
When you start calculating saving account interest, you’ll need to know a few things:
- The interest rate
- Bank fees
- How often interest is compounded (daily or monthly)
The APY, or annual percentage yield, factors in monthly fees charged by your bank. Since most of the best savings banks today do not charge monthly fees, we will leave that out of the calculations for now.
Calculating Simple Interest
First, start by calculating simple interest on an account holding $1,000. Let’s calculate 2.96% simple interest for one year, paid annually.
You’d use the following formula:
Principal X Interest Rate = Interest
The math would equate to $1,000 X 0.03 = $1,029.60.
How To Calculating Saving Account Interest in Easy Steps
Most banks, however, pay compound interest. That means the interest you earn on your principal gets added to the principal and also earns interest. Many online banks compound interest monthly.
What’s the Difference Between APY and Interest Rate?
Your annual percentage yield is how much interest you earn annually, minus fees. When a bank quotes a 3% APY, the bank is already factoring compounding into the mix. Banks often quote the APY on savings accounts, rather than the interest rate, because it’s a bigger number.
Take a look at Varo Bank’s high-yield savings of 3% APY. You can earn more if you maintain a high average daily account balance. But for simplicity’s sake, let’s use Varo’s 3% APY, which is a 2.96% interest rate, compounded monthly.
How Much Interest Will I Get on $1,000 a Year in a Savings Account?
If you find a high-yield savings account with an APY of 3% or more, your money can really add up quickly. Let’s calculate compound interest on that same $1,000, at 3% APY for the year or a 2.96% interest rate.
To calculate how much you’ll earn after a year, you need to know:
- Your principal balance
- Your interest rate
- How often interest is compounded in a year
- Number of time periods that have passed (or will pass)
Your formula to calculate compound interest and your total account balance at the end of the year will look like this: A = P(1+r/n)nt
When you plug this formula into a compound interest calculator, you will see that at the end of one year, you’ll have $1,030 in your savings account, or you will have earned a 3.0% APY.
That’s a little bit more than the money you’ll earn with simple interest of 2.96% ($1,029.60 vs. $1,030).
FAQ
Here are the answers to some of the most frequently asked questions about calculating interest on savings accounts.- How much interest will I earn on $10,000?
- You can use the same calculation, or an interest rate calculator like the one at GOBankingRates, for any amount of money. Make sure to enter the APY, not the interest rate, in the calculator for an accurate calculation.
- A 3% APY on $10,000, compounded monthly, will earn $10,300.05.
- Which bank gives 7% on a savings account?
- Although interest rates have been rising steadily, no U.S. bank or financial technology company currently offers 7% interest or APY on their savings account.
- Digital Federal Credit Union offers one of the highest APYs for a savings account, at 6.17% with its Primary Savings Account, provided you meet all of the requirements.
- Otherwise, you may be able to get a 7% return with the stock market or with a 401(k) investment. If you want your savings to grow, set a savings goal to add a small -- or large-- amount to your account monthly. You'll earn interest on your principal, your interest and the savings you add each month.
- How much interest will $50,000 earn in a savings account?
- Here's how to calculate simple interest and compounding interest at 3% APY.
- Simple interest: $50,000 X 0.03 = $51,500
- Compound Interest (at 3% APY) equates to $51,500.24
- Here's how to calculate simple interest and compounding interest at 3% APY.
The information related to the Chase Savings℠ account was collected by GOBankingRates and has not been reviewed or provided by the issuer of this product. Product details may vary. Please see the issuer’s website for current information. GOBankingRates does not receive commission for this product.
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- Business Insider. 2023. "The average bank interest rates for CDs, savings accounts, checking accounts, and money market accounts."
- Investor.gov. "Compound Interest Calculator."
