DEFINITION

The money that you earn in the form of interest on savings is the money that you earn when you deposit it into a savings account. It is important to know how to calculate it so that you can compare the savings accounts from different banks and find the one that will work for you while it helps your money grow, it is important to know how to calculate it because it is important to know how to calculate it. When you put money into a savings account at the bank, you get paid interest on that money. Every time a period ends, the interest that was earned on savings is credited back to the account, and this amount becomes your new balance. At the end of the following period, interest will be applied to your account based on the new balance. One of the fundamental principles behind using your money as a tool to help you grow financially is the concept of compound interest, which can be explained as follows: You should familiarise yourself with the formulas for simple interest and compound interest, as well as the method for determining the annual percentage yield rate on a savings account.

Key Takeaways

When you put money into a savings account that also pays interest, you will start to accumulate interest on your savings.
Compound and simple interest are the two primary varieties of interest that are available.
Calculators and spreadsheet templates that are available online can be of assistance in streamlining the process if you do not wish to perform the calculations on your own.
The annual percentage yield of your account is a useful tool for estimating how much money you will have at the end of each period and the end of each year.

How to Compute the Most Basic Form of Interest Gained from Savings

Use the following formula to determine how much interest you earned on your savings during a single period:

Interest = Principal x Rate x Number of Periods

For instance, if the interest rate on your savings account was 5 per cent per year and you deposited $100, you would compute the interest as follows: $100 multiplied by.05 times 1 for a total of $5. When you put money into a savings account, the bank effectively borrows that money from you, so they can pay you interest on it. This serves two purposes: first, it encourages you to keep your money in a savings account, and second, it pays you interest on the money they borrowed from you. NOTE: There is no nefarious purpose behind a bank using your money in this manner; rather, it is used to generate loans for other customers and to maintain the flow of money throughout the economy. Another way the bank makes money is by charging other customers a higher interest rate than the one it offers to you. Collect the following information to perform the calculation necessary to determine the amount of interest you have earned from your savings account: Principal: This is the balance of your account at the amount that you have loaned to the bank. Interest payment frequency: This is the frequency with which the bank will pay you interest (yearly, monthly, or daily, for example). Interest Rate: The interest rate refers to the percentage of money that is added to your account each year. Term: This is the total amount of time that the loan will be paid back over. For this variable, you will need to perform a conversion from months to years. One month, for instance, is equivalent to.083 years, two months are equivalent to.167 years, and 18 months are equivalent to 1.5 years. When you have all of the information, you can calculate the interest you have earned on your savings by using either the simple or compound interest formulas and plugging in the numbers. For instance, the interest that you gain on your savings throughout a single period is an example of simple interest.

How to Compute the Interest Earned on a Savings Account Using Compound Interest

Use the following formula to calculate the interest that is compounded: Where the different variables can be found: A equals the cumulative value in the distant future P equals the first deposit made. r equals the current interest rate n = the number of times that compounding takes place t equals the number of periods that have passed or that will pass in the future. You need to take into consideration two factors to calculate compound interest on a savings account: More frequent periodic interest payments: Multiple interest payments are made on yearly basis to many accounts that bear interest. For instance, the interest may be paid out every month by your bank. A growing amount of money in the account: Any interest payments will cause the subsequent interest calculations to be adjusted accordingly. At this point, you must factor in the presumption that the interest on your bank account compounds monthly. Make use of this formula for calculating compound interest to determine the final amount after one year (A). If you were to put $100 into an account for savings that earned interest on a monthly basis for a period of one year, you would calculate it as follows:

A = $100 [1 + (.05 ÷ 12)] 12 * 1
A = $100 [1 + (.004167)] 12
A = $100 [1.004167] 12
A = $100 [1.0512]
A = $105.12

In this particular illustration, your account gained $5.12 in interest. TIP: You can use a calculator that takes into account compound interest to obtain a quick answer or to check your calculations. When you use the online calculator, the results you get might be different.

Taking Into Account the Ongoing Savings Through Deposits

The previous examples take it for granted that you will make a single deposit, but this is not typically how people save their money. It is more typical to make several smaller deposits into a savings account consistently. You can easily take into account those additional deposits by making some minor modifications to the formula. In the following examples, everything will remain the same as it was in the previous equation for monthly compounding; however, instead of making an initial deposit of $100, we will assume that you start with nothing and have the intention of making deposits of $100 each month for the next five years. To perform calculations by hand, you will need to use the formula for future value. This equation looks like this:

FV equals the account's potential value in the future after taking into account deposits and compounding interest.
The monthly payment amount is denoted by "pmt."
r equals the interest rate on a monthly basis (divide the annual rate by 12)
n equals the number of months in a year

The following is the formula for a sequence of identical periodic deposits spread out over a period of five years:

FV = $100 x [{ ((1 + 0.004167) 60) – 1 } ÷ 0.004167]
FV = $100 x [{ 1.283 – 1 } ÷ 0.004167]
FV = $100 x 68.0067
FV = $6800.68

How to Figure Out How Much Interest You Have Earned on Your Savings Within an Excel Spreadsheet

Spreadsheets can help automate the process and give you the flexibility to make rapid adjustments to the data you input. You will need to make use of the future value function to compute the amount of interest you will earn using a spreadsheet. The amount that your asset will be worth at some point in the future is known as the future value. This value is calculated based on an assumed growth rate. This formula is represented by the letter "FV" in spreadsheet programmes like Microsoft Excel and Google Sheets, among others. To create a spreadsheet from scratch, you should begin by entering the following information into any cell to calculate your simple interest earnings: This formula requires the following components, which are to be comma-separated:

The rate of interest (5 per cent in the example)
The total number of times (interest is paid once per year)
Regular payments (this straightforward illustration is based on the assumption that you won't make any additional deposits in the future)
Present value ($100 initial deposit)

Because there is only one compounding period, the formula that you just looked at displays simple interest rather than compound interest (annual). Because of the way spreadsheets are programmed and the way accounting works, you will need to enter your payment as a negative number for the sheet to show a positive total. To create a spreadsheet with more advanced features, separate the cells that contain the rate, the time, and the principal. After that, you'll be able to make changes to your formula by simply referring to the relevant cells and modifying them accordingly.

Additional Procedures for Complicated Scenarios

To apply this formula on a spreadsheet to a bank account that earns compound interest, you will need to make a few adjustments to the numbers. To convert this annual rate into a monthly rate, divide 5% by 12 months (0.05 12), which will give you 0.004167 as the result. To determine the cumulative effect of monthly compounding over several years, you would divide each year into 12 periods. Take five years as an example; this equates to sixty periods. In this instance, the formula on your spreadsheet would look something like this: After five years, you would have a total of $6,800.68 in your possession.

Performing the Calculations for the Annual Percentage Yield

Compounding your investments every month results in higher annual returns, as shown by the equation. When you open a savings account, you will typically receive an interest rate that is communicated to you in the form of an annual percentage yield (APY). Because the annual percentage yield (APY) is typically higher than the "interest rate," and because it is simple to calculate because it takes into account the effects of compounding, most banks advertise it for interest-bearing accounts. As a result of the fact that it does not take into account regular contributions, it is most useful for determining how much a single deposit will be worth at the end of a given year. Even though the interest rate is the same in both examples (5%), the annual percentage yield (APY) is higher in the example with compounding because it is calculated as follows: APY = (1 + (.05 ÷ 12)) 12 - 1 APY= (1 + .004167) 12 - 1 APY = ( 1.004167 ) 12 - 1 APY = 1.0512 - 1 APY = .0512 or 5.12 percent When interest is paid out at intervals other than once per year, the annual percentage yield (APY) rises above the stated annual rate. You won't need to do any complicated calculations because the APY will tell you exactly how much you'll earn over a year. To find out how much interest you've earned on your savings, simply multiply your principal by the APY.

Questions That Are Typically Asked

If I put $1,000 into a savings account, how much interest will I get on that money?

If you invest $1,000 in a savings account that offers an annual percentage yield of 0.1 per cent, you will have a total of $1,000.10 at the end of the first year.

How is the interest on a savings account determined and distributed?

The formula for calculating simple interest is Interest = P x R x N, where P represents the beginning balance, R represents the interest rate, and N represents the number of periods. After the period, the interest is distributed.

How do you figure out how much interest you will pay each month?

The straightforward formula for calculating interest is as follows: Interest = P x R x N, where P is the balance, R is the interest rate, and N is the number of periods. This will give you the interest accrued per month.