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How to Calculate Interest on a Bank Savings Account

written by: Ivana Banks•edited by: Donna Cosmato•updated: 9/11/2011

Have you ever wondered how to calculate interest on a savings account? Well, this article gives you the formulas and examples, so that you can determine whether you are getting the best return on your money.

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    Introduction

    Are you confused about how to calculate the interest on a bank account for savings? If the answer is yes, don't worry because many people don't understand how the interest was calculated on their bank statements. Here we explain what you should know about savings account interest rates, how to calculate them, and how to make the most money out of your savings.Magic Money 

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    Banking Deposits and APY

    The annual percentage yield (APY) is a method used to calculate compound interest on a savings account deposit. Basically, APY will allow a depositor to receive interest, on top of interest, that they've already accumulated. Having said that, it would be to the advantage of the depositor to choose a savings account that compounded interest on a more frequent basis. Why? Because, the more your money compounds interest, the more interest you will be able to make. In other words, daily compounding will make you more money than yearly compounding.

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    How Do I Calculate Interest on a Savings Account?

    If you are anything like most people, when they see complicated formulas, they immediately become intimated. However, this formula looks more intimidating than it really is. Besides, don't you want to get the best out of your savings account? If you answered yes, then keep reading, because here we will provide you with the steps on how to calculate interest on a savings account.

    The formula for APY (interest rate) is as follows:

    APY = (1 + r/n)^n – 1

    That means:

    APY = (1 + interest rate/number of periods) ^ number of periods - 1

    **(^ represents to the power of)

    Example # 1 – Interest Rates Compounded Monthly

    Interest Rate: 12%

    Deposit Amt: $1,000

    APY = (1 + 0.01)^12 – 1

    APY = 1.1268 – 1

    APY = 12.68%

    1,000 X 0.1268 = $126.80

    Therefore, the depositor earned an additional $126.80 in compound interest for a deposit of $1,000. This would bring the total deposit to $1,126.80.

    Growing money 

    Example # 2 – Interest Rate Compounded Yearly

    Interest Rate: 12%

    Deposit Amt: $1,000

    APY = (1 + 0.12)^1 – 1

    APY = 1.12 – 1

    APY = 12%

    $1,000 X .12 = $120

    **Tip: You can visit calculator.com to assist you in performing calculations for your savings interest rate.

    Likewise, if a depositor earned an additional $120 dollars in compound interest it would bring the total account balance to $1,120.

    As you can see, depositors can use compounding interest to their advantage by choosing a bank that compounds interest on a more frequent basis. In fact, it is strongly suggested that you not only scrutinize the APY banking rate, but that you also consider the amount of times your interest is compounded. In other words, a person whose interest is compounded quarterly, has three additional times to earn interest - on top of interest - than the person who compounds yearly only.

    Congratulations! You've gotten through the calculations portion of the article unscathed! Now, let's find the best banks that offer better APY rates so that you can get a better return on your savings deposits.

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    The Best Way to Get A Great Interest Rate

    If you would like to know, “What is the interest rate on a bank savings account?". You should first start by researching online and offline for the best interest rate that you can find. Also, make sure that your bank compounds the interest on a more frequent basis. Sometimes, you may be offered a higher interest rate at one bank, however,they do not compound interest on a regular basis. So make sure that you perform you calculations to choose the account that will give you the better return.

    Currently, there are three leading banks that offer the best interest rates in the country. They are:

    • Sallie Mae
    • Clear Sky Accounts
    • Ally Bank

    On the other hand, if you are willing to try nontraditional savings accounts. Depositing your money into an online savings account might be a great alternative option. The leading online banks that offer great interest rates on savings accounts are:

    • ING Direct Orange Savings Account
    • E-Loan Savings Account
    • HSBC Online Savings Account
    • Emigrant Direct

    Money Floating to Sky 

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    So there you have it! A quick and easy way to know how to calculate interest on a savings account. Now that you are armed with this information, you can easily determine which bank will give you the best return on your money.

    References:

    http://www.investopedia.com/terms/a/apy.asp

    Photo Credits:

    Growing Money - freedigitalphotos.net/Pixomar

    Magic Money - freedigitalphotos.net/renjith krishnan

    Money Floating to the Sky – freedigitalphotos.net/Salvatore Vuono






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