There are three practical ways to work out the interest on a savings account, depending on what information you have. All three give the same answer when used correctly.
Method 1: from the APY (simplest)
If your bank quotes an APY, use annual compounding — the APY already includes the effect of more frequent compounding.
Interest for t years = P × [ (1 + APY)t − 1 ]
One year: $15,000 at a 4.25% APY earns 15,000 × 0.0425 = $637.50.
Six months: 15,000 × [(1.0425)0.5 − 1] = $315.43. Note this is slightly less than half of $637.50, because the second half-year would earn interest on the first half’s interest.
Method 2: from the nominal rate and compounding frequency
If you know the stated rate and how often interest compounds:
A = P × (1 + r/n)n × t Interest = A − P
$15,000 at 4.2% compounded monthly for one year: 15,000 × (1.0035)12 − 15,000 = $642.27 (an APY of 4.28%).
Method 3: day by day (how many banks do it)
Many banks calculate interest on each day’s closing balance and add it to the account monthly:
Daily interest = balance × annual rate ÷ 365
For a 31-day month with a steady $15,000 balance at 4.16%: 15,000 × 0.0416 ÷ 365 × 31 = $53.00. In a 30-day month it would be $51.29. This is why monthly interest on your statement varies slightly even when your balance does not.
If your balance changes during the month, apply the daily rate to each day’s balance (or to the average daily balance) and add them up.
Adding regular deposits
If you save every month, each deposit earns interest only from the day it arrives. The future value is the lump-sum growth plus the growth of the deposits:
FV = P(1 + i)N + C × [(1 + i)N − 1] ÷ i
where i is the monthly rate, N the number of months and C the monthly deposit. The regular contributions calculator does this, including deposits at the start or end of the month.
What reduces the interest you keep
- Tax — savings interest is taxable in many countries, sometimes withheld at source.
- Fees — monthly maintenance fees can exceed the interest on small balances.
- Rate changes — variable rates and introductory bonuses that expire.
- Tiered rates — some accounts pay different rates on different portions of the balance.
- Inflation — reduces the real value of your interest; see How Inflation Affects Savings.
Quick checklist
- Find the APY (or the nominal rate and compounding frequency) in your account terms.
- Note your balance and how long it will stay there.
- Use Method 1 or 2 — or simply enter the numbers in a calculator.
- Deduct any tax and fees for the amount you will actually keep.
Calculate in seconds with the Compound Interest Calculator or see each month’s interest with the Monthly Interest Calculator.