January 25, 2023 |3 min read
Wondering how to calculate savings interest? Nowadays there are plenty of online calculators that do the math for you.
But learning to make sense of the numbers can help you understand the specifics of why you’re earning as much (or as little) as you are.
APY vs. monthly interest rate
First, let’s talk about two ways you might encounter interest rates: APY and the monthly interest rate. Most banks advertise their interest rates in the form of APY, or Annual Percentage Yield, which is a percentage reflecting how much total interest you can earn on an account per year. However, most savings accounts calculate and pay interest monthly instead of annually. So, how do you find your monthly interest rate? It’s easy. Simply divide your APY by 12 (for each month of the year) to find the percent interest your account earns per month.
For example:
- A 12% APY would give you a 1% monthly interest rate (12 divided by 12 is 1).
- A 1% APY would give you a 0.083% monthly interest rate (1 divided by 12 is 0.083).
Now, you have your monthly interest rate and can start to calculate how much you will actually save.
How do you calculate monthly interest earned on a savings account?
Calculating your monthly interest earned starts with knowing the basic equations for calculating simpleversuscompound interest:
Simple interest1
A = P x R x T
Compound interest2
A = P(1 + R/N)NT
You may recognize these equations from high school algebra—remember when your teacher said you’d use it in real life some day? Well, today’s the day!
While it looks daunting, these equations use variables that can easily be decoded. Here’s what each variable represents:
- A: the amount of money you’ll have in your bank account after interest is paid
- P: your principal deposit, or the original balance of your account
- R: the yearly interest rate of your account in decimal format (APY)
- N: the number of times your bank compounds interest in a year (12 times)
- T: the time, in years, you want to calculate for(1 month = 0.083 years)
But before you break out your calculator, it may be helpful to understand the two different types of interest and how they can earn you money.
The two types of interest
While it may seem like a couple of pennies now, interest adds up over time—those pennies turn into dollars, then into tens of dollars, and well, you get the rest. Whether you are a strict saver who doesn't touch a cent of their savings or a planner who likes to save for specific life events or goals, figuring out how to calculate monthly interest on a savings account starts with a basic understanding of simple and compound interest.
Simple interest
Simple interest is money earned solely on the principal, or the original amount of money deposited.1 It doesn’t account for any interest earned over time.
Compound interest
Compound interest is calculated using the principal balance plus any interest it has earned over time.2 When this earned interest is compounded depends on your bank and your account. Interest could be compounded daily, monthly, quarterly or annually.3 Most interest-earning accounts use compounding interest formulas.
How much interest will I get on $1,000 after a year in a savings account?
Generally, traditional savings accounts use compound interest too.1 To calculate how much annual interest you’ll earn on $1,000, use this equation: A = P(1 + R/N)NT
If you have an account with $1,000 that compounds monthly with a 1% APY, first you would identify all your variables.
- A =the total amount you’re trying to find
- P =your principal amount of $1,000
- R =your yearly interest rate (APY) in decimal format 0.01 (divide 1 by 100)
- N =your bank compounds monthly, so it would compound 12 times a year
- T =1 because you are looking to find your interest earned after 1 year
Then, plug all of these numbers into the equation: A = 1,000(1+ 0.01/12)12 x 1
And finally, type the equation into a calculator—or use a pencil and paper if you’d like—to get your total amount of $1,010.05.
Growing your savings over time
Learning how to calculate interest earned on savings is a process. But if you understand more about how interest works, managing your money can be easier.
