How to Calculate Interest on Savings Account

Keeping money in a savings account isn’t just about placing funds in a reliable place.

It’s also a smart way to earn a little extra from what you already have. But to really make the most of it, you should know how interest is calculated and how it adds up over time.

In this guide, we’ll walk you through everything you need to know about savings account interest calculation, from simple math formulas to real-life examples.

You’ll also learn the difference between simple and compound interest and how that affects your total earnings.

Why Do Banks Pay Interest on Savings Accounts?

Banks use the money you deposit to fund loans and other investments.

In return, they give you a portion of what they earn by paying interest on your deposit.

It’s a win-win: they get money to use, and you get a little bit added to your savings.

This interest is usually expressed as an annual percentage yield (APY). The higher the APY, the more money you earn.

However, the method used to calculate interest can significantly impact the actual amount you receive over time.

How is Interest Calculated on a Savings Account?

Interest on a savings account is calculated using one of two methods: simple interest or compound interest. Here’s how each works:

The Simple Interest Formula

This formula shows how much interest you’ll earn on a fixed balance over a certain time period:

Interest = P × R × T

Where:

• P = Principal (your original deposit)

• R = Annual interest rate (as a decimal)

• T = Time in years

Let’s break this down with an example:

Suppose you deposit $10,000 in a savings account that earns 4% interest per year. Calculate the interest for one year:

Interest = $10,000 × 0.04 × 1 = $400

That means you’d earn $400 in one year, assuming you didn’t withdraw or add any more money into the savings account.

How is interest calculated in savings accounts monthly?

Interest on savings accounts is calculated monthly by dividing the annual interest rate by 12. If compounded, the interest is added to the principal each month, and future interest is calculated on the new balance. If using simple interest calculation, the same amount is added each month based on the original balance.

Understanding Compound Interest

Compound interest means you don’t just earn interest on your deposit—you also earn interest on the interest that’s already been added to your account.

This is where the real magic of saving happens.

The more often interest is added (compounded), the more your money grows.

Let’s look at the difference using the same $10,000 deposit at 4% annual interest over five years.

• With simple interest: Interest = $10,000 × 0.04 × 5 = $2,000

• With compound interest (daily compounding): You’d earn about $2,214 over the same period.

That extra $214 is from earning interest on your interest. The more often your bank compounds the interest—daily, monthly, quarterly—the more you’ll earn.

Is simple interest or compound interest better?

Compound interest is better because it allows you to earn interest on both the initial principal and the accumulated interest, leading to faster growth over time.

Compound Interest Formula

Here’s the formula for compound interest:

A = P(1 + r/n)ⁿᵗ

Where:

• A = Final amount (including interest)

• P = Principal

• r = Annual interest rate (as a decimal)

• n = Number of times interest is compounded per year

• t = Number of years

For illustration, let’s plug in some numbers:

• P = $10,000

• r = 0.04

• n = 365 (daily compounding)

• t = 5 years

A = $10,000(1 + 0.04/365)^(365×5) ≈ $12,214

That’s a more accurate figure showing how your money grows over time with compounding.

How to Calculate Monthly Interest on a Savings Account

Banks typically calculate interest monthly, even if it’s paid quarterly or annually.

Here’s how you calculate monthly interest on savings account balances:

• Monthly interest rate = 3.6% ÷ 12 = 0.3% or 0.003 as a decimal

• Monthly interest = $5,000 × 0.003 = $15

So, you’d earn $15 that month, which would be added to the principal balance and earn interest in the future.

The difference between simple and compound interest becomes noticeable over time as compound interest accumulates, since future interest is calculated on both the principal and the interest that has already been added.

How to Use This Information to Make Smart Saving Decisions

Now that you know how interest works, how can you make sure you’re earning as much as possible?

Here are a few practical tips:

• Compare interest rates between banks. Some savings accounts may earn 4% or more, while others pay less than 1%.

• Look for an online savings account with a higher APY and no monthly or low fees.

• Ask about compounding. Opt for accounts with frequent compounding (e.g., monthly or daily). The more frequently interest is compounded, the greater your returns.

• If you plan to keep funds in the account for a short time, the difference between simple interest and compound interest would not make a significant difference.

• For long-term goals like retirement, choose accounts with compound interest. The longer the time horizon, the more beneficial compound interest becomes.

How to Calculate Bank Interest Over Time

To calculate bank interest over time, decide first whether they are using simple or compound interest.

• Use simple interest for rough estimates.

• Obtain compounding information from the depository institution (interest calculation method and compounding frequency) for more accurate projections.

Why Compounding Frequency Matters

One important thing to remember is that the number of times interest is added (compounded) makes a real difference.

Let’s take $5,000 at 4% interest for five years.

How often is interest paid on savings accounts?

This depends on the bank and the type of account. Some pay monthly, others quarterly or even annually, but most calculate bank interest daily or monthly.

SBI California: A Smarter Way to Grow Your Savings

At State Bank of India (California), we understand the importance of growing your savings with clarity and confidence.

Whether you're just starting out or building toward a long-term goal, we offer many solutions that help your money go further.

Here's how we support your saving journey:

• Competitive Savings Rates: Our online savings account options offer better returns with no hidden fees.

• Easy Account Opening: You can open a bank account online in just a few steps—no need to visit a branch.

• Certificates of Deposits (CDs) for Long-Term Goals: Prefer a fixed-term deposit with a fixed rate? Explore our attractive CD rates today and let your savings grow predictably.

• Flexible Banking for Everyday Use: You can pair your savings with our free checking account for managing bills, expenses, and transfers.

• Personalized Support: We’re here to help you understand your options, without confusing terms or fine print.

SBI California has served communities for decades, building trust with every transaction.

Let us help you save smart, grow steady, and reach your goals.

Can I increase my savings interest rate?

Some banks offer high-yield savings accounts, which may pay higher interest. SBI California offers competitive interest on high-yield savings accounts. If you are looking for higher interest rates and don’t need to access the deposits for a fixed period, you can also look into our CD rates for long-term savings.

Wrapping Up

Knowing how interest is calculated gives you more control over your money.

Using a simple formula for quick estimates or a compound interest calculator for long-term planning helps you see just how much your savings can earn.

By keeping an eye on rates, compounding frequency, and account types, you can make smart choices for your future.

And if you're ready to take the next step, consider opening an online savings account or a free checking account with SBI California.

We offer clear, easy-to-understand options that help your money grow, without the hassle.

Let your savings work harder for you. Start exploring your options today.