Calculating interest earned on a savings account it fairly simple!
Keep reading below to find out how much interest $1,000 will earn.
Interest On Saving Accounts
Borrowing money comes at a cost: this is called interest. When the time comes to pay the money back, the interest is paid back in addition to the original amount that was borrowed.
When you deposit your money into a savings account, the bank is essentially borrowing your money. The bank then loans your money to borrowers and, in return, it pays you interest for letting it use your money.
Finding a saving account is also very important take a look at some our best savings accounts here
How Is Interest Calculated
The formula for calculating the interest you’ll earn from a savings account is:
I = P x R x T
- I = Interest. This is the amount of money paid to you by the bank.
- P = Principal. This represents the sum you deposited into your account.
- R = Rate. This is the annual interest rate offered by the bank.
- T = Time. Since we are considering an annual interest rate, time in this case is the number of years that has passed.
How Simple Interest Works
Simple interest is the interest paid on the principal you initially deposit. The above formula calculates simple interest.
Some specific accounts, like CDs with specific brokers, pay a simple interest rate. However, when you’re considering where to invest your money, consider an account that pays you in compound interest instead.
How Compound Interest Works
Generally with most savings accounts, the interest you earn isn’t just on the money you initially deposit. Most savings accounts use compound interest.
Essentially, you earn interest on the interest that you earned the previous month or day, in addition to the interest you earn on your principal.
Conclusion
Savings accounts play an important role in your financial health. Combined with regular deposits, a savings account with a good interest rate will set you up for financial success.
Additionally, If you are interested be sure to check out our list of bank bonuses, saving rates and CD rates!
