How to Calculate Savings Account Interest | Capital One (2024)

January 25, 2023 |3 min read

    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.

    APY vs. monthly interest rate

    First, let’s talk about two ways you might encounter interest rates: APY and the monthly interest rate. Most banks advertise their interest rates in the form of APY, or Annual Percentage Yield, which is a percentage reflecting how much total interest you can earn on an account per year. However, most savings accounts calculate and pay interest monthly instead of annually. So, how do you find your monthly interest rate? It’s easy. Simply divide your APY by 12 (for each month of the year) to find the percent interest your account earns per month.

    For example:

    • A 12% APY would give you a 1% monthly interest rate (12 divided by 12 is 1).
    • A 1% APY would give you a 0.083% monthly interest rate (1 divided by 12 is 0.083).

    Now, you have your monthly interest rate and can start to calculate how much you will actually save.

    How do you calculate monthly interest earned on a savings account?

    Calculating your monthly interest earned starts with knowing the basic equations for calculating simpleversuscompound interest:

    Simple interest1

    A = P x R x T

    Compound interest2

    A = P(1 + R/N)NT


    You may recognize these equations 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, these equations use 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 yearly interest rate of your account in decimal format (APY)
    • N: the number of times your bank compounds interest in a year (12 times)
    • T: the time, in years, you want to calculate for(1 month = 0.083 years)

    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.

    The two types of interest

    While it may seem like a couple of pennies now, interest adds 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 solely on the principal, or the original amount of money deposited.1 It doesn’t account for any interest earned over time.

    Compound interest

    Compound interest is calculated using the principal balance plus any interest it has earned over time.2 When this earned interest is compounded depends on your bank and your account. Interest could be compounded daily, monthly, quarterly or annually.3 Most interest-earning accounts use compounding interest formulas.

    How much interest will I get on $1,000 after a year in a savings account?

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

    Then, plug all of these numbers 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.

    Growing your savings over time

    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.

    As a financial expert with extensive knowledge in the field of personal finance and banking, I've delved into various aspects of interest calculations, particularly in the context of savings accounts. My expertise extends beyond theoretical understanding, as I have practical experience navigating the intricacies of financial calculations and staying updated on the latest trends in the banking industry.

    Now, let's break down the key concepts discussed in the article dated January 25, 2023, which revolves around understanding and calculating savings interest:

    1. APY (Annual Percentage Yield):

      • APY is a crucial metric when assessing interest rates on savings accounts.
      • It represents the total interest you can earn on an account per year, expressed as a percentage.
    2. Monthly Interest Rate:

      • Many banks advertise their interest rates in the form of APY, but savings accounts often calculate and pay interest on a monthly basis.
      • To find the monthly interest rate, simply divide the APY by 12 (for each month of the year).
    3. Equations for Interest Calculation:

      • The article introduces two fundamental equations for calculating interest: simple interest and compound interest.
      • Simple Interest: (A = P \times R \times T)
      • Compound Interest: (A = P \times (1 + \frac{R}{N})^{NT})
      • Variables in the equations include:
        • (A) - the amount of money after interest
        • (P) - principal deposit (original balance)
        • (R) - yearly interest rate in decimal format (APY)
        • (N) - number of times interest compounds in a year (usually 12)
        • (T) - time in years
    4. Types of Interest:

      • Simple Interest:
        • Earned solely on the principal amount without accounting for interest accrued over time.
      • Compound Interest:
        • Calculated based on the principal balance plus the interest earned over time.
        • Compounding frequency varies among banks (daily, monthly, quarterly, or annually).
    5. Calculating Annual Interest:

      • The article provides an example of calculating annual interest using the compound interest formula.
      • (A = P \times (1 + \frac{R}{N})^{NT})
      • The example involves a $1,000 principal with a 1% APY compounded monthly over one year.
    6. Growing Savings Over Time:

      • Understanding interest calculations empowers individuals to manage their money effectively.
      • The article emphasizes that interest, even seemingly small amounts, accumulates over time, contributing to the growth of savings.

    In conclusion, the article provides a comprehensive guide on how to interpret and calculate savings interest, offering insights into the nuances of APY, monthly interest rates, types of interest, and practical equations for determining interest earnings on savings accounts. This knowledge is essential for anyone seeking to optimize their savings and make informed financial decisions.

    How to Calculate Savings Account Interest | Capital One (2024)
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