The two formulas that determine how much interest you make

Interest on a savings account is calculated one of two ways: simple interest or compound interest. Most savings accounts use compound interest, which means you earn interest on the money you deposited plus interest on the interest you've already earned. Simple interest only pays you on your original deposit.

Your bank's disclosure documents will tell you which method they use. The difference matters because compound interest grows faster, especially over years. A $5,000 deposit earning 4% annually will grow to $5,200 in one year with simple interest, but $5,204 with daily compounding—a small gap that widens the longer your money sits.

To calculate either one, you need three pieces of information: the amount you deposited (called the principal), the interest rate your bank pays (shown as an annual percentage rate or APR), and how often the bank compounds the interest (daily, monthly, quarterly, or annually).

Key Takeaways

  • Simple interest only pays on your original deposit and uses the formula: Interest = Principal × Rate × Time.
  • Compound interest pays on your deposit plus previously earned interest, and the formula is: Final Amount = Principal × (1 + Rate ÷ Compounding Periods)^(Compounding Periods × Time).
  • Most savings accounts compound daily, which means interest is calculated and added to your balance every single day.
  • Your bank's deposit agreement or account disclosures will state the APR and how often compounding happens.
  • Online calculators can do the math for you, but understanding the formula helps you compare accounts before opening one.

How to calculate simple interest by hand

Simple interest is the easiest calculation. Use this formula: Interest = Principal × Annual Interest Rate × Time (in years).

Say you deposit $10,000 in a savings account paying 3% APR, and you leave it untouched for 2 years. The math is: $10,000 × 0.03 × 2 = $600. You earn $600 in interest, so your balance after 2 years is $10,600.

Simple interest is rare in savings accounts today, but some money market accounts or certificates of deposit (CDs) use it. The advantage is predictability—you know exactly how much you'll earn. The disadvantage is that you miss out on the compounding effect that makes your money grow faster.

How to calculate compound interest by hand

Compound interest uses a different formula because the interest gets added to your balance, and then you earn interest on that new balance. The formula is: Final Amount = Principal × (1 + Annual Rate ÷ Number of Compounding Periods per Year)^(Number of Compounding Periods per Year × Number of Years).

That looks complicated, so here's a concrete example. You deposit $10,000 at 3% APR in an account that compounds daily (365 times per year). After 2 years, the calculation is: $10,000 × (1 + 0.03 ÷ 365)^(365 × 2). Breaking it down: (1 + 0.000082) = 1.000082, raised to the power of 730, which equals 1.0618. Multiply that by $10,000 and you get $10,618. You earned $618 in interest instead of $600—an extra $18 because of compounding.

The more often interest compounds, the more you earn. Daily compounding beats monthly, which beats quarterly, which beats annual. Most online savings accounts compound daily, which is why they often pay more than brick-and-mortar banks that compound monthly or quarterly.

What the compounding frequency actually means

When a bank says interest compounds daily, it means the bank calculates how much interest you've earned that day, adds it to your balance, and then uses that new balance to calculate tomorrow's interest. You don't see the money move—it all happens behind the scenes—but your balance grows a little bit every single day.

If interest compounded annually instead, the bank would wait a full year, calculate all the interest at once, and add it to your account on the anniversary date. You'd earn less because you wouldn't earn interest on the interest for most of that year.

Your bank's account disclosure (sometimes called a Truth in Savings disclosure) will state the compounding frequency. Look for language like "interest compounds daily" or "compounded daily and credited monthly." The "credited" part means when the interest actually shows up in your account—it might compound daily but only show up on your statement monthly.

Using online calculators instead of doing the math yourself

Most people don't calculate compound interest by hand. Online savings calculators do the work for you. You enter the principal, the APR, the compounding frequency, and the time period, and the calculator shows you the final amount and total interest earned.

Your bank's website usually has a calculator built in. If not, search for "savings calculator" or "compound interest calculator"—many financial websites offer free ones. The results should be identical regardless of which calculator you use, as long as you enter the same numbers.

Calculators are useful when you're comparing accounts before opening one. You can plug in the same deposit amount and time period into different banks' calculators to see which one pays the most interest. A difference of 0.5% APR might seem small, but over several years it adds up.

Why your actual interest earned might differ from your calculation

If you calculate your interest and then check your account statement, the numbers might not match exactly. This happens for several reasons. First, the APR your bank advertises can change. Banks lower rates when the Federal Reserve cuts rates, and raise them when the Fed raises rates. If your rate changed during the time period you're calculating, your math won't match.

Second, you might have made deposits or withdrawals. The formulas above assume your principal stays the same. If you deposited $10,000 but added $500 three months later, your calculation needs to account for that timing.

Third, banks sometimes use a slightly different day count. Most use 365 days per year, but some use 360. The difference is tiny but real. Your bank's disclosure will state which method they use.

Finally, the bank might round interest to the nearest cent. If your calculated interest is $47.634, the bank credits $47.63. Over time these rounding differences are negligible, but they explain why your statement might show $47.63 when your calculator said $47.64.

How to find your account's APR and compounding frequency

Your bank's website usually displays the current APR on the account page or in the account details section. If you can't find it online, log into your account or call the customer service number on the back of your debit card.

The compounding frequency is in your deposit agreement or account disclosure document. This is a legal document banks must give you when you open an account. If you didn't receive one, ask your bank to send it. It will state the APR, the compounding method, and when interest is credited to your account.

Keep in mind that the APR shown online is current as of that moment. Banks change rates frequently, sometimes daily. If you opened your account six months ago at 4.5% APR and the current rate is now 3.8%, your account earns at the 3.8% rate going forward—not the old rate. Your bank will notify you of rate changes, usually by email or through your online account.

Frequently Asked Questions

Does my bank round interest up or down?

Banks round to the nearest cent, which typically means rounding down unless the third decimal place is 5 or higher. The rounding rules are in your deposit agreement. The difference is usually a fraction of a cent per month, so it doesn't meaningfully affect your balance.

What if I withdraw money before the interest is credited?

Interest is calculated based on your balance during the period it covers. If you withdraw money before interest is credited, you lose the interest that would have been earned on that withdrawn amount. Some banks credit interest daily, so the impact is minimal; others credit monthly, so timing matters more.

Can I calculate interest if my rate changes mid-year?

Yes, but you need to split the calculation into two periods. Calculate interest for the months at the old rate, then calculate interest for the months at the new rate, and add them together. Your bank's calculator usually handles this automatically if you enter the rate change date.

Is APY different from APR for savings accounts?

Yes. APR is the annual percentage rate without compounding factored in. APY (annual percentage yield) includes the effect of compounding. APY is always higher than APR on a savings account. Banks must disclose both, and APY is the number that shows you what you'll actually earn.

Why do online banks pay more interest than traditional banks?

Online banks have lower overhead costs because they don't operate physical branches. They pass those savings to customers through higher APRs. The compounding frequency is usually the same (daily), so the difference is purely the rate itself.