Calculate How Much Money I Make From Savings Account
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Reviewed by Calculator Editorial Team
Calculating how much money you make from a savings account involves understanding the interest your money earns. This calculator helps you determine your earnings based on the type of interest (simple or compound) and the terms offered by your bank.
How to Use This Calculator
To calculate how much money you make from a savings account, follow these steps:
- Enter the principal amount (the initial deposit you make).
- Select the interest type (simple or compound).
- Enter the annual interest rate (APR or APY).
- Enter the time period in years.
- Click "Calculate" to see your earnings.
The calculator will display your total earnings and show a chart of your balance growth over time.
Simple Interest Calculation
Simple interest is calculated on the original principal amount only. The formula for simple interest is:
Simple Interest = Principal × Rate × Time
Where:
- Principal = Initial amount of money
- Rate = Annual interest rate (in decimal)
- Time = Time the money is invested (in years)
Simple interest is straightforward but doesn't account for the growth of interest on previously accumulated interest, which is why compound interest is often preferred.
Compound Interest Calculation
Compound interest is calculated on the initial principal and also on the accumulated interest of previous periods. The formula for compound interest is:
Compound Interest = Principal × (1 + Rate/Compounding Frequency)^(Compounding Frequency × Time) - Principal
Where:
- Principal = Initial amount of money
- Rate = Annual interest rate (in decimal)
- Compounding Frequency = Number of times interest is compounded per year (e.g., 1 for annually, 4 for quarterly)
- Time = Time the money is invested (in years)
Compound interest can significantly increase your earnings over time compared to simple interest.
APR vs APY Explained
APR (Annual Percentage Rate) is the simple annual interest rate on a loan or savings account. APY (Annual Percentage Yield) is the real rate of return, taking into account compounding interest.
Example: If a savings account offers a 5% APR compounded annually, the APY would be slightly higher than 5% because of compounding.
When comparing savings accounts, always look at the APY to understand the true return on your money.
Worked Example
Let's say you deposit $1,000 in a savings account with a 3% APY compounded annually for 5 years.
Using the compound interest formula:
Final Amount = 1000 × (1 + 0.03)^5 ≈ $1,159.27
Total Interest Earned = $1,159.27 - $1,000 = $159.27
After 5 years, you would earn $159.27 in interest, bringing your total balance to $1,159.27.
Frequently Asked Questions
What is the difference between APR and APY?
APR is the simple annual interest rate, while APY is the effective annual yield that takes compounding into account. APY is always higher than APR for compounding accounts.
How often is interest compounded in savings accounts?
Interest in savings accounts is typically compounded daily, monthly, quarterly, or annually. The more frequently interest is compounded, the higher your effective APY.
Can I withdraw money from a savings account without penalty?
Most savings accounts allow free withdrawals, but some may have restrictions or fees for excessive withdrawals. Check your account terms for details.