What Is Interest Earned on Savings?

As your savings grow, it helps to learn how to calculate interest. Interest earned on your savings is the money you receive from a bank or financial institution after depositing the money into one of the types of savings accounts offered.

Depending on the interest rate you earn, the formula used to calculate the interest earned can vary. Learn everything you need to know about interest and how to use different formulas to calculate interest earned on savings. You will learn how to calculate the following:

Simple interest
Individual investments (individual deposits)
Compound swears
Investments in progress (monthly deposits, for example)

What are the earnings from savings?

By definition, interest is the money paid by the borrower of funds, whether it is a person who uses a credit card or a financial institution in which they have saved their savings.

Interest is the cost of borrowing money. When you borrow money, you usually get your money back and a little more. This additional amount is "interest" or your compensation for allowing someone else to use your money. The same is true when you fund an interest-bearing account.

When you make deposits into savings accounts or certificates of deposit (CDs) at a bank or credit union, you are lending your money to the bank. The bank takes the funds and invests them, possibly lending this money to other customers.

To calculate interest on a savings account, collect the following information:

The amount of your deposit, or the amount you borrow, using the variable "p" for "principal"

How often to calculate and pay interest (yearly, monthly or daily, for example), using "n" for the number of times a year

The interest rate, using "r" for the rate in decimal format.

How long do you earn interest, using "t" for the term (or time) in years

For a quick answer, use a sample calculator on Google Sheets to calculate interest (you'll need to copy the sheet into another document for your own use).

How to Calculate Interest Earned on Savings

Although interest calculated on personal savings accounts is almost always calculated as compound interest, we will cover both simple and compound interest.

Solve for simple interest

Simple interest is earned only on the dollars you invest, which is also known as your original principal. Here, you do not earn interest on the dividends your savings earn.

Simple Interest Example: Suppose you deposit $ 100 in your bank, earn interest annually, and the account pays 5%. How much will you have after one year?

For the most basic calculation, start with the simple interest formula to solve for the interest amount (i).

Simple interest

The above calculation works when your interest rate is quoted as an Annual Percentage Yield (APY) and when you are calculating interest for a single year. Most banks advertise the APY; the number is usually higher than the "interest rate" and it is easy to work with because it is responsible for compounding.

Compound interest resolution

With compound interest, there is interest accruing on the original principal and interest accruing over time.

Compounding occurs when you earn interest on a deposit or loan, and then the money you earn earns additional interest.

To calculate compound interest on a savings account, your formula must take two things into account:

More frequent recurring interest payments - Many interest-bearing accounts pay interest more than once a year. For example, your bank may pay interest on a monthly basis.

A growing account balance - Any interest payment will alter subsequent interest calculations.

We hope you enjoy watching this video about What Is Interest Earned on Savings?

Source: Discover


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