Savings accounts earn compound interest. The essence of this technology is as follows. Your savings account makes a certain amount of interest per month. After that, for the next month, the percentage is already calculated from the rate for the previous reporting period. To understand how much you will receive in the end in a savings account, you should use a unique calculator that takes into account compound interest. This article will teach you how to calculate interest earned on a savings account using a simple formula.
Features of calculating interest on a savings account
You need to multiply the current interest rate from a banking institution by the remaining time on the deposit to know how do you earn interest in a savings account. The interest formula looks quite simple:
Percentage = P x R x N.
- This formula is deciphered as follows:
- P is the initial amount of your deposit.
- R denotes the interest rate on the deposit for the year. This amount is usually presented as a decimal.
N indicates the period over which the interest rate is calculated. As a rule, for most banks, this period is one year, but other options are possible.
Let's look at such an example below. For example, you have a $15,000 savings account. It brings you an income of 3% per year. You need to know how to find interest rates. The interest rate in decimal form is as follows: 0.03. As a result, the formula looks like this:
Interest = $15,000 x 0.03 x 1. As a result, you receive $450 in income per year.
At the same time, interest rates in most banks can be much lower than described in the example. As a rule, the common value of savings in savings accounts is 0.07%. Various online calculators help you calculate earned interest and possible options for deposits and earnings within a specific time interval. You can choose the best option for opening a savings account.
Remember that if you receive only 0.1% per year on a deposit of $ 10,000, then the yield on such a savings account will be no more than 10%. In practice, such a savings account is not profitable for customers since it will not work to make money on it. To determine the possible amount of earnings, you should pay attention to the features of interest accrual under your agreement.
Simple and compound interest
As a rule, you receive a certain percentage on a savings account. Subsequently, this interest will earn more interest over time of your contribution. Compound interest is a rather complicated procedure that requires taking into account your total income.
Consider the following example. For example, you earned $15 from your contribution. This additional amount in your account will generate extra income at the bank's interest rate. Compound interest helps to increase the return on investment over time, even at the lowest interest rate. Features of calculating bank interest differ depending on the policy of a particular bank.
How much can you earn with compound interest?
For example, you have $15,000 in your savings account. This deposit brings you an income of 0.6% per annum, and the deposit is designed for four years. Then, using the formula described above, you will get this result: 15,000 x 0.006 x 4. As a result, simple interest is $ 360 on your contribution. With daily interest, you will receive a slightly more significant amount. As a rule, the difference in yield is almost the same at low-interest rates. If the interest rate is higher, then the chances are that you can earn a lot more.
You can calculate the required interest on a savings account deposit. You can use methods on how do you calculate interest rates to know this information. Then you can find out how much you earn under certain circumstances. The compound interest formula requires many variables to be taken into account. There is a rule on how to calculate interest:
Percentage = P (1 + r/n) ^ n x t.
In this formula, the parameters are:
- Interest indicates the final amount of the deposit.
- P is the initial amount of your deposit.
- r represents the value of the interest rate on the deposit.
- n denotes the amount on which interest has been calculated.
- t stands for time intervals.
Compound interest helps you increase the efficiency of your investment. It is an excellent opportunity to put your savings to work for you. Please note that banks may change the conditions for deposits over time. As you can see, the process on how to find interest is straightforward.
To increase your earnings on a savings account, you need to consider many subtleties. First, you need to familiarize yourself with the conditions offered by banks. Many institutions provide pretty attractive interest rates, which allows you to get a good income in the future. Compare all available solutions to choose the best option how to calculate monthly interest on the savings account.