# How to Calculate Interest on Savings

By Stephanie Powers

• #### Overview

Calculate the interest on your savings by multiplying the interest rate by the balance in your account. Adjust the interest amount to accommodate compounding frequency, and add the interest to the previous balance. Here's how to make these calculations.
• #### Step 1

Understand the interest rate. Different types of investments have different interest rates. The Annual Percentage Rate (APR) is the total amount of interest earned yearly. The Annual Percentage Yield (APY) includes all income applied to the account. This number is useful to compare various accounts such as money market, Certificates of Deposit (CDs), bonds, etc. Some interest rates vary based on a given benchmark such as the Treasury Notes. Other accounts offer rates that increase as the amount in the account increases. Read the fine print on all accounts to determine what rate is used.
• #### Step 2

Determine how often the interest rate is applied to the balance. The interest rate may be applied to the account balance daily, weekly, monthly, semi-annually, annually, etc. Interest on savings is most beneficial when it is compounded. Compounded interest is when interest earned on one period is added to the balance then in next period interest is applied to both the original balance and the interest from the previous balance. In effect, you earn interest on your interest.

• #### Step 3

Calculate the total interest earned. Let's assume that your account balance is \$1,000 and the interest is 2 percent APR, compounded monthly. Since there are 12 months per year, divide 2 percent by 12 to get the the amount earned daily, in this case \$0.0017. Multiply the balance by the interest rate to determine the interest earned. Add the interest earned to the previous balance to obtain the new balance. Repeat this process each compounding period. Beginning Balance = \$1,000 January \$1,000 x 0.0017 = \$1.70 (balance=1,001.70) February \$1,001.70 x 0.0017 = \$1.7029 (balance=1,003.40) March \$1,003.4 x 0.0017 = \$1.7058 (balance=1,005.11) April \$1,005.11 x 0.0017 = \$1.7087 (balance=1,006.82) May \$1,006.82 x 0.0017 = \$1.7116 (balance=1,008.53) Total interest earned: \$8.53 Total may vary slightly due to rounding. Sometimes interest is earned daily, but applied to the balance less often (weekly, monthly). When multiple types of investments earn different rates, calculate each investment separately before adding them together.
• Skill: Moderate
• Ingredients:
• Calculator
• Tip: Use a financial calculator for easy future value calculations given a specific interest rate.
• Warning:
• The total amount of interest earned may be reduced by fees applied to the account.

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