How to Calculate Interest on Savings Accounts

Savings accounts can help you to set aside money for short- and long-term financial goals, but how much interest you earn depends on your account’s interest rate. That is why knowing how to calculate interest on savings accounts can help you choose the best savings option that will earn you the most growth. A financial advisor could help you create a financial plan to reach your savings goals.

How Does a Savings Account Earn Interest?

Banks and credit unions pay interest on savings accounts for one simple reason: to attract new customers. Financial institutions use money that you deposit into a savings account, along with deposits from other customers, to make loans and investments. It is in the bank’s interest to draw in new savers with competitive rates.

Savings account interest can take one of two forms. Banks can pay savers simple interest or compound interest, and they are calculated in different ways, affecting how much your savings can grow.

Simple interest is the interest earned on the principal balance only. When calculating simple interest on a savings account, you are only considering the amount you have deposited.

Compound interest, meanwhile, considers both the principal balance and any interest earned. You often hear it referred to as the interest on your interest. Banks can choose how often to compound interest on a savings account. For example, some banks compound interest daily while others compound monthly. Interest earned on a savings account is usually credited to your account once per month or statement cycle.

Between simple interest and compound interest, compound interest can help you to grow your money faster.

How to Calculate Interest on Savings Account Balances

How you calculate interest on a savings account depends on whether the account earns simple or compound interest. Each one has its own formula for the calculation. If you are not sure whether your savings account earns simple or compound interest, call your bank to ask.

Calculating Simple Interest on a Savings Account

Assuming that your savings account earns simple interest, here’s what the interest calculation formula would look like:

Interest earned = P x R x N

Here’s what each letter in the formula means:

P = Principal or your savings account starting balance
R = Interest rate earned for the year
N = Number of time periods that you’re measuring interest earned

You’ll sometimes see this same formula with a ‘T’ substituted for the N. The ‘T’ stands for time, which for most simple interest calculations is usually one year.

As an example of how to calculate interest on a savings account using simple interest, say you deposit $1,000 into an account earning 1%. Assuming you want to know how much interest you’d earn in a year, the formula would look like this:

$1,000 x 0.01 x 1 = $10

The simple interest calculation is easy to apply if you know the interest rate, the starting balance and how long you want to measure interest growth.

Calculating Compound Interest on a Savings Account

If you’ve got a savings account that earns compound interest, you’ll need to do a little more math. The formula for calculating compound interest on a savings account looks like this:

Interest earned = P(1 + r/n)^nt

Here’s what each letter means:

P = Principal or starting balance
r = Interest rate
n = Number of times interest compounds over a one-year period
t = Time you want to calculate interest (measured in years)

Using the previous example, say you deposit $1,000 into a savings account earning 1%, with interest compounding daily. After one year, you’d earn $10.05 in interest. That doesn’t seem much different from the simple interest calculation, but you have to remember that time is on your side when it comes to compounding.

The longer you have to save and the more frequently interest compounds, the more your money can grow. Making regular contributions to savings can also help you to earn more interest over time.

It’s possible to do this calculation yourself but you might find it easier to plug the numbers into an online savings account calculator. SmartAsset’s online savings calculator lets you see how much interest you could earn, whether you’re saving a little money or a lot.

How Can I Earn More Interest on a Savings Account?

If you want to earn as much interest as possible with a savings account, the first step is choosing the right savings option.

Banks and credit unions can offer several kinds of savings accounts, but they are not all alike. For example, the interest rate you earn with a savings account at a traditional bank may be much lower than the rate you can get with a high-yield savings account from an online bank. An online bank may charge fewer fees to boot.

Comparing savings accounts at different banks, whether they are online or brick-and-mortar, can help you gauge the rate and APY you can earn. Some types of savings accounts to consider include:

Traditional savings accounts
Online savings accounts
High-yield savings accounts
Money market savings accounts
Specialty savings accounts (i.e., Christmas Club savings, wedding savings, etc.)

It’s a good idea to look at whether you are earning simple or compound interest with a savings account. In the case of compound interest, look to see how often it compounds. Daily compounding, for example, can help you grow your money slightly faster than monthly compounding.

You can also earn more interest by making regular contributions to your savings account. For instance, you can link your checking to your savings with a schedule that allows for recurring transfers on a weekly or monthly basis. You can also ask your employer to send part of your direct deposit to savings every payday.

How to Use Interest Calculations for Goal Planning

Understanding how interest works can help you set savings goals and track them more effectively. Whether you are building an emergency fund or saving for a large purchase, calculating how much interest your account earns allows you to estimate how long it will take to reach your target. For example, knowing your annual percentage yield (APY) and compounding frequency helps you forecast future balances based on your regular contributions.

You can also adjust your plan based on different scenarios. If your goal is time-sensitive, such as a down payment needed in two years, you might calculate how much you need to deposit each month to reach that amount with your current interest rate. Alternatively, if you can change your timeline, you may see how saving longer allows you to contribute less each month.

Running calculations for various timeframes and interest rates can help you decide what is realistic and where you might want to open an account.

Online savings calculators make this easier by allowing you to plug in your current balance, interest rate, compounding frequency and monthly deposits. This approach turns abstract financial goals into specific numbers, making it easier to stay on track.

Once you understand the impact of interest, you can make informed decisions—such as switching to a high-yield account or increasing contributions—to meet your savings goals more efficiently.

Should I Save Money or Invest?

If you’re interested in growing your money even more, you might want to invest some of your savings. Investing money means you’re putting it into the market rather than parking it in a savings account. For example, you might buy individual shares of stock, mutual funds or real estate investments.

Investing money can be one of the best ways to capitalize on compounding interest because you stand to earn much higher returns compared to a savings account. As an example, you might get a 2% APY with a savings account but earn 10% or more on your investments.

The longer you have to invest, the more time you have to leverage compound interest to your benefit. Of course, investing money in the market can be riskier than keeping it in a savings account. So, you’ll need to consider your personal risk tolerance and goals when deciding how much to invest and where. Those are things a financial advisor could help you with.

Bottom Line

A woman putting coins into a jar to symbolize savings.

Calculating interest on your savings can help you decide where to save and how much to deposit each month. Be sure to ask your bank whether the account uses simple or compound interest so you can apply the correct formula.

Checking Account Tips

Consider talking to your financial advisor about developing a plan for saving and investing. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Certificate of deposit (CD) accounts are another way to save. With a CD account, you deposit money, and it earns interest over a set time period. Once the CD matures, you can withdraw your initial deposit and the interest earned or roll it into a new CD. A CD could be a good savings option if you’d like to get a guaranteed rate but keep in mind that withdrawing money before maturity could trigger a penalty fee. Just remember to compare CD rates before opening an account.