How to Calculate Monthly Interest Earned on Savings Account
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Calculating monthly interest earned on a savings account is essential for understanding your earnings and financial growth. This guide explains the process step-by-step with a built-in calculator and detailed explanations.
How to Calculate Monthly Interest
Monthly interest on a savings account is calculated by applying the account's annual percentage yield (APY) to the current balance, then dividing by 12 to get the monthly amount. Here's how to do it manually:
- Find your current account balance.
- Determine the APY percentage (e.g., 3.5%).
- Convert the APY to a monthly rate by dividing by 12.
- Multiply the current balance by the monthly rate to get the monthly interest.
Note: Some accounts use simple interest (APR) instead of compound interest (APY). The calculation method differs slightly between these types.
The Formula
The basic formula for monthly interest is:
Monthly Interest = (Current Balance × (APY ÷ 12)) ÷ 100
For compound interest accounts, the monthly interest is calculated on the current balance plus any previously earned interest. For simple interest accounts, the monthly interest is calculated only on the original principal.
Worked Example
Let's calculate the monthly interest for a $5,000 savings account with a 3.5% APY:
- Current Balance = $5,000
- APY = 3.5%
- Monthly Rate = 3.5% ÷ 12 = 0.2917%
- Monthly Interest = ($5,000 × 0.2917) ÷ 100 = $14.58
After one month, you would earn $14.58 in interest.
| Month | Starting Balance | Monthly Interest | Ending Balance |
|---|---|---|---|
| 1 | $5,000.00 | $14.58 | $5,014.58 |
| 2 | $5,014.58 | $14.60 | $5,029.18 |
| 3 | $5,029.18 | $14.62 | $5,043.80 |
FAQ
- How often is interest calculated on savings accounts?
- Most savings accounts calculate interest monthly, though some may calculate daily or quarterly. Check your account agreement for specifics.
- Is the interest calculated on the daily balance or monthly average?
- Most savings accounts use the monthly average balance to calculate interest. This means the interest is based on the average balance throughout the month.
- What's the difference between APY and APR?
- APY (Annual Percentage Yield) includes compound interest and shows the actual return after compounding. APR (Annual Percentage Rate) is the simple interest rate before compounding.
- How do I find my APY?
- Your APY is typically listed on your bank statement, account summary, or on the bank's website. You can also contact customer service for this information.