How to calculate interest earned on a savings account

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.

Calculating your monthly interest earned starts with knowing the basic equations for calculating simple and compound interest:

Simple interest¹

A = P x R x T

Compound interest²

A = P(1 + R/N)^NT

You may recognize the equation 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, the equation uses 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 interest rate of your account in decimal format
• N: the number of times your bank compounds interest in a year
• T: the time, in years, you want to calculate for

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.

While it may seem like a couple of pennies now, interest can add 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 on the principal, or the original amount of money deposited.¹ It doesn’t account for interest earned over time. Most interest-earning accounts use compounding interest formulas.¹

Compound interest

Compound interest is calculated using the principal balance plus interest earned over time.² When interest is compounded depends on your bank and your account. Interest could be compounded daily, monthly, quarterly or annually.³

Generally, traditional savings accounts use compound interest.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 at a 1% interest rate, 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 interest rate in decimal format 0.01 (divide 1 by 100)
• N: your bank compounds monthly, so it would compound 12 times a year
• T: you are looking to find your interest earned of 1 year

Then plug it 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.

If you’re looking for faster ways to save, other savings vehicles like money market accounts (MMAs) and certificates of deposits (CDs) may be a better fit for you.

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.