A Savings Account Earns 6 APR Interest Calculated Monthly
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Reviewed by Calculator Editorial Team
When you deposit money into a savings account with a 6% APR interest rate compounded monthly, your balance grows over time through monthly interest calculations. This calculator helps you determine how much interest you'll earn and how your balance will grow.
How Monthly Interest Calculations Work
Monthly interest calculations mean your savings account earns interest on your balance every month. The interest is calculated based on the current balance, not just the original deposit. This process is called compounding.
With a 6% APR compounded monthly, your account earns 0.5% interest each month (6% divided by 12 months). This small monthly rate is applied to your balance, and the interest is added to your account each month.
Note: APR stands for Annual Percentage Rate, which is the annual interest rate. When interest is compounded monthly, the effective annual rate (EAR) is slightly higher than the APR.
Key Terms
- Principal (P): The initial amount of money you deposit.
- APR (r): The annual interest rate (6% in this case).
- Monthly Interest Rate: APR divided by 12 (0.5% for 6% APR).
- Time (t): The number of months the money is invested.
- Future Value (FV): The amount of money accumulated after n months, including interest.
The Formula
The formula for calculating the future value of a savings account with monthly compounding is:
FV = P × (1 + r/n)n×t
Where:
- FV = Future Value
- P = Principal amount
- r = Annual interest rate (APR)
- n = Number of times interest is compounded per year (12 for monthly)
- t = Time the money is invested for, in years
For our specific case with 6% APR compounded monthly, the formula becomes:
FV = P × (1 + 0.06/12)12×t
This formula shows how your principal grows over time with monthly compounding.
Worked Example
Let's calculate how much $1,000 will grow to in 5 years with a 6% APR compounded monthly.
FV = 1000 × (1 + 0.06/12)12×5
= 1000 × (1 + 0.005)60
= 1000 × (1.005)60
= 1000 × 1.34885
= $1,348.85
After 5 years, your $1,000 deposit will grow to approximately $1,348.85 with 6% APR compounded monthly.
Interest Earned
The total interest earned is the future value minus the principal:
Interest = FV - P
= 1,348.85 - 1,000
= $348.85
Comparison Table
This table compares how different deposit amounts grow over 5 years with 6% APR compounded monthly.
| Principal ($) | Future Value ($) | Interest Earned ($) |
|---|---|---|
| 1,000 | 1,348.85 | 348.85 |
| 2,500 | 3,372.12 | 872.12 |
| 5,000 | 6,744.25 | 1,744.25 |
| 10,000 | 13,488.50 | 3,488.50 |
FAQ
What is the difference between APR and APY?
APR stands for Annual Percentage Rate, which is the annual interest rate. APY stands for Annual Percentage Yield, which is the actual annual rate of return after compounding. For 6% APR compounded monthly, the APY is approximately 6.17%.
How often is interest calculated in a savings account?
Most savings accounts calculate interest monthly. This means your balance earns interest every month based on the current balance, which leads to compounding.
Can I withdraw money from a savings account without penalty?
Yes, you can typically withdraw money from a savings account without penalty, but some accounts may have withdrawal limits or restrictions. Check your account terms for details.
Is it better to have a higher APR or a lower APR?
A higher APR generally means you'll earn more interest on your savings, which is beneficial for growing your money. However, consider other factors like fees, accessibility, and your financial goals when choosing a savings account.