When you open a savings account, you can set aside money for emergencies, build up a travel fund or save for a new car. Savings accounts typically pay interest, and over time, savings account interest can help your money grow. The amount of interest you earn can depend on your financial institution and the type of account.
Here we'll discuss how to calculate savings account interest to find out how much your account can earn.
A savings account is a type of bank account you can open with a bank or credit union. It's a deposit account, meaning you make deposits, either in cash or by electronic or direct deposit, and the bank keeps it safe on your behalf.
Most banks pay interest on savings accounts, meaning they pay you a modest amount for each statement period you keep your money in the account. The interest rate is typically written as the annual percentage yield (APY), or the rate of return you'll earn over the course of one year.
In exchange for paying out interest, banks often institute account restrictions. For example, some banks require a minimum balance, charge monthly maintenance fees or limit customers to six withdrawals or less per month.
How much your account grows depends on several factors, such as the interest rate the bank offers and your balance. Rates can vary significantly between banks. Nationally, the average APY on savings accounts is under 0.50%. However, some banks offer substantially higher rates, but they may require a higher minimum balance. For example, with a Citizens Access Savings account, a high-yield savings account, you can earn an APY of 4.00% or higher.
To put those rates into context, consider these examples: Let's say you have $1,000 and put it into a savings account with an APY of 0.46%. After one year, your account would grow to $1,004.60. After five years, your account balance would reach $1,023.21, assuming you don't add or withdrawal any money.
If you put that money into a high-yield account that earned 4.00% APY, your $1,000 would grow to $1,040 in one year. After five years, your account balance would be $1,216.
Savings Account at 0.46% APY | Savings Account at 4.00% APY | |
Balance After One Year | $1,004.60 | $1,040.00 |
Balance After Two Years | $1,009.22 | $1,081.60 |
Balance After Three Years | $1,013.86 | $1,124.86 |
Balance After Four Years | $1,018.53 | $1,169.86 |
Balance After Five Years | $1,023.21 | $1,216.65 |
Example assumes an initial $1,000 deposit and interest compounds annually.
When it comes to interest, there are two main types:
In general, savings accounts are more likely to have a compound interest structure than a simple interest structure.
The formula for how to calculate savings account interest varies based on the interest structure. For simple interest, the formula is Principal (your beginning balance) x APY x number of time periods (usually the number of years).
For example, if you calculate the rate for a $1,000 deposit into an account with a 4.00% APY over four years, you'd use this formula:
$1,000 (the principal) x 4.00% (APY) x 4 (number of years) = $160
As you can see, you'd earn $160 in interest over four years, bringing your account balance to $1,160.
Compound interest is more complex. The formula is:
A = P(1+r/n)nt
Where:
For example, to calculate the savings account interest of a $1,000 deposit over four years (assuming the interest is compounded once a year), follow this formula:
$1,000 x (1 + 0.04/1)4 = $1,169.86
The good news is you don't have to worry about calculating the interest on your own. You can use an online compound interest calculator to get accurate calculations.
With a savings account, you can build a safety net or save for a dream vacation in a secure, safe place. And, your account can earn interest. Now that you know how to calculate savings account interest, you can see how much your money will grow over time, helping you to stay motivated as you work toward your goals. Get started by opening a new savings account so you can begin earning interest.
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Disclaimer: The information contained herein is for informational purposes only as a service to the public and is not legal advice or a substitute for legal counsel. You should do your own research and/or contact your own legal or tax advisor for assistance with questions you may have on the information contained herein.