How to Calculate Interest in a Savings Account

When you earn interest in a savings account, the bank is literally paying you money to keep your cash deposited. And with savings, your money compounds, which means even your interest earns interest.

Figuring out how much you'll earn over time means calculating how much your money compounds. We’ll get into that later on, but you can start by using the simple interest formula.

How to calculate interest in a savings account

To calculate the simple interest you’ll earn in a savings account, multiply the account balance by the interest rate by the time period the money is in the account. Note that the interest in savings is money you earn, not money you pay.

Simple interest formula

The formula for calculating simple interest is: Interest = P * R * T.

P = Principal amount (the beginning balance).

R = Interest rate (usually per year, expressed as a decimal).

T = Number of time periods (generally one-year time periods). Say you have a savings account with $10,000 that earns 4% interest per year. Expressed as a decimal, the interest rate is 0.04, so the formula would be:

Interest = $10,000 * 0.04 * 1, which equals $400.

Interest rates in some of the best savings accounts are above 4%. Others earn much less. In fact, the national average savings rate is only 0.42%. You can use NerdWallet’s savings calculator to figure out how much interest you could earn with different rates and time periods.

Here’s another simple interest example: If a $10,000 deposit is in an account that earns only 0.15% interest per year, the interest rate would be expressed as 0.0015. In this case, the calculation would be:

Interest = $10,000 * 0.0015 * 1.

Interest = $15.

The interest rate formula is best for calculating roughly how much your money can earn based on the principal balance. To know precisely how much you could earn in a savings account over time, you’ll want to consider the effect of compounding.

» Ready to earn interest? Learn about the best places to save money and earn interest

Savings account simple interest vs. compound interest

If you're earning interest in a savings account, that interest will also earn interest over time. That means your overall earnings will be a bit higher than the simple interest formula above suggests.

Say your account has earned $10 in interest. If you leave that extra bit of money in your account, it will also start earning money during each compounding period (many online savings accounts compound daily). The rate of compounded interest earned over a year is referred to as the annual percentage yield (APY). You'll typically see savings account rates expressed as an APY.

How much interest will I earn on $10,000?

Say you have $10,000 in a high-yield savings account that earns 4% APY, and you keep the money in the account for five years.

If interest is compounded daily, you’d earn about $2,214. Compare that with earning only simple interest and no compounding: With the simple interest formula (Interest = $10,000 x 0.04 x 5), you can see that your simple interest would be only $2,000.

With compounding, you get $2,214 instead of $2,000. It's additional money with no additional effort on your part. The higher the rate, the more your money will grow. And the more compounding periods there are, the more your money can grow as well.

Use NerdWallet’s compound interest calculator and select the compounding period (daily, monthly or annually) to determine how much you could earn in different scenarios. Or you could use the compound interest formula below to calculate it manually.

» Want to dig deeper? Read this primer on compound interest

Compound interest is a good way to have your money work for you, but you can really boost your savings if you take the additional step of making regular savings deposits. More deposits mean faster growth.

In the example above, say you deposit an extra $100 a month after the initial $10,000. In five years, you would have deposited an extra $6,000 ($100 * 12 months a year * 5 years = $6,000). But when compounded daily at 4% APY, your balance grows to about $18,845.

You don’t need to have $10,000 to take advantage of compound interest

You can start small. Suppose you begin with a $20 savings balance and make savings deposits on a regular basis. For example, say you set aside some money from each paycheck and then deposit $40 each month into your savings account for a year.

After those 12 months, you would have deposited $480 ($40 * 12 months = $480), on top of the initial $20, for a total of $500. Continue doing that for five years, and you would have $2,420 in deposits ($480 * 5 years = $2,400, plus the original $20). But if that money is in a savings account that earns a 4% APY over the entire term, compounded daily, the account balance would be $2,676.38.

So your money would have earned you an extra $256.38. It’s worth noting that interest rates in savings accounts are variable and can change at any time. If you would like to deposit your money in an account with a fixed rate, consider a high-performing certificate of deposit.

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