How to Calculate Interest Paid on Savings Account
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Reviewed by Calculator Editorial Team
Calculating the interest paid on a savings account is essential for understanding your earnings and making informed financial decisions. This guide explains both simple and compound interest calculations, provides a practical calculator, and offers real-world examples.
What is Interest on a Savings Account?
Interest is the reward you earn for depositing money in a savings account. Banks pay interest to incentivize customers to keep their money with them rather than in cash or other financial instruments. There are two main types of interest calculations: simple interest and compound interest.
Key Terms:
- Principal (P): The initial amount of money deposited
- Interest Rate (r): The annual percentage rate charged or earned
- Time (t): The duration the money is invested/deposited (in years)
- APR: Annual Percentage Rate (simple interest rate)
- APY: Annual Percentage Yield (compound interest rate)
Simple Interest Calculation
Simple interest is calculated only on the original principal amount. It's the most straightforward interest calculation method.
Simple Interest Formula:
Interest = Principal × Rate × Time
I = P × r × t
Where:
- I = Interest earned
- P = Principal amount (initial deposit)
- r = Annual interest rate (in decimal)
- t = Time the money is deposited (in years)
The total amount (A) in the account after time t is:
A = P + I = P + (P × r × t) = P(1 + r × t)
Example: If you deposit $1,000 at 5% APR for 3 years:
Interest = $1,000 × 0.05 × 3 = $150
Total amount = $1,000 + $150 = $1,150
Compound Interest Calculation
Compound interest is calculated on the initial principal and also on the accumulated interest of previous periods. This method leads to exponential growth of your savings.
Compound Interest Formula:
A = P(1 + r/n)^(n×t)
Where:
- A = Amount of money accumulated after n years, including interest
- P = Principal amount (initial deposit)
- r = Annual interest rate (in decimal)
- n = Number of times interest is compounded per year
- t = Time the money is invested/deposited (in years)
The interest earned (I) is then:
I = A - P
Example: If you deposit $1,000 at 5% APY compounded annually for 3 years:
A = $1,000(1 + 0.05)^3 ≈ $1,157.63
Interest = $1,157.63 - $1,000 = $157.63
Notice how compound interest ($157.63) earns more than simple interest ($150) for the same parameters.
How to Use This Calculator
Our interactive calculator makes it easy to determine interest earned on your savings account. Simply enter:
- The principal amount (initial deposit)
- The annual interest rate (APR or APY)
- The time period (in years)
- Whether to calculate simple or compound interest
- For compound interest, specify how often the interest is compounded
The calculator will display the interest earned and the total amount in your account after the specified time period.
Worked Examples
Example 1: Simple Interest
You deposit $5,000 in a savings account with a 3% APR for 5 years.
Interest = $5,000 × 0.03 × 5 = $750
Total amount = $5,000 + $750 = $5,750
Example 2: Compound Interest
You deposit $2,000 in a savings account with a 4% APY compounded quarterly for 10 years.
A = $2,000(1 + 0.04/4)^(4×10) ≈ $3,322.22
Interest = $3,322.22 - $2,000 = $1,322.22
| Type | Principal | Rate | Time | Interest Earned | Total Amount |
|---|---|---|---|---|---|
| Simple | $1,000 | 5% | 3 years | $150 | $1,150 |
| Compound (annually) | $1,000 | 5% | 3 years | $157.63 | $1,157.63 |
| Compound (monthly) | $1,000 | 5% | 3 years | $157.97 | $1,157.97 |
Frequently Asked Questions
What's the difference between APR and APY?
APR (Annual Percentage Rate) is the simple interest rate, while APY (Annual Percentage Yield) accounts for compound interest. APY is always higher than APR for the same nominal rate because it includes the effect of compounding.
How often is interest compounded in savings accounts?
Most savings accounts compound interest daily, monthly, or annually. The more frequent the compounding, the higher the effective interest rate.
Is compound interest always better than simple interest?
Yes, compound interest generally grows your money faster over time because it earns interest on previously earned interest. However, simple interest may be easier to understand and predict.
Can I withdraw money from a savings account before maturity?
Yes, but early withdrawals may result in losing some or all of the interest earned. Check your account terms for specific penalties.
How do I choose the best savings account?
Consider factors like interest rate, minimum balance requirements, fees, accessibility, and whether you prefer simple or compound interest.