Earning interest on your savings. It sounds awesome. But how does the interest formula for a savings account even work?

While building an investment portfolio is often a key element of growing your money, tapping into an interest-bearing savings account is another worthwhile part of a solid financial plan.

As you start to save, it's natural to wonder how much your funds can grow over time, based on simple and compound interest.

We're sharing a couple of interest formulas for savings accounts to help you figure out how much you can earn.

Simple Interest Formula For A Savings Account

If you want to learn how much simple interest you’ll earn from a savings account, you'll need to multiply your account balance by the time period the funds will remain in the account and the interest rate.

Here’s the formula: Simple Interest = P x R x T

In the formula, the variables include the following:

• P - Represents the principal amount, otherwise known as the beginning balance.
• R - Represents the interest rate expressed as a decimal.
• T - Represents the number of time periods.

The following example can help you put these variables into context.

How To Calculate Simple Interest In A Savings Account: Example

Let’s say you deposit $20,000 into a savings account that earns 5% interest per year. When expressed as a percentage, the interest rate equals 0.05. You plan to leave the funds untouched for one year.

Here’s the formula:

Simple interest = $20,000 x 0.05 x 1 = $1,000

If the savings account only earned 1% interest, here’s what it would look like:

Simple interest = $20,000 x 0.01 x 1 = $200

Simple Interest vs Compound Interest

The simple interest formula offers an estimate of how much you can expect to earn over the course of a specified time period. But in order to get a more accurate estimate of the amount of interest you’ll earn, you’ll need to take compounding into account.

Compound interest works by earning interest on interest you’ve already earned. As time marches by, the amount you’ll earn increases in pace due to the interest already added to your balance.

In general, compound interest is expressed as the annual percentage rate (APY).

Compound Interest Formula For A Savings Account

Most savings accounts use compound interest - where you earn interest n your interest.

Here’s the formula: Compound Interest = P (1 + (r/n)) ^nt

For this formula, we'll use the following variables:

• P - represents the principal amount, otherwise known as the beginning balance
• R - represents the interest rate expressed as a decimal
• T - represents the number of time periods, usually in years
• N - represents the number of times interest is compounded in a year

We explore an example below to help you put these variables into context.

How To Calculate Compound Interest In A Savings Account: Example

Let’s say you deposit $20,000 into a savings account that earns 5% APY. The interest is compounded monthly. When expressed as a percentage, the interest rate equals 0.05. You plan to leave the funds untouched for two years.

Interest = 20,000 (1 + (0.05/12))^(12 x 2)

Interest = $2,098.83

If you left the funds untouched for longer, the interest would continue to compound. For example, let’s say you left the funds to compound monthly with a 5% APY for five years. Here’s how much you could earn.

Interest = 20,000 (1 + (0.05/12))^(12 x 5)

Interest = $5,667.17

Other Free Interest Calculators

If you don’t want to put pen to paper, that’s okay. You can take advantage of one of the many free calculators online to map out your interest earnings.

For example, Investor.gov offers a compound interest calculator to make your calculations easier.

Where To Make The Most Of Your Savings

If you want to put your savings to work, check out our list of the best high-yield savings accounts. Depending on the market, you might find a wide range of rates available. Of course, it’s usually a good idea to snag the highest interest rate you can.

If you'd rather secure a potentially higher interest rate for a predetermined period, a certificate of deposit (CD) might be a better fit. Many CDs offer attractive rates for savers, and shopping around can pay off.

The Bottom Line

Smart savers can map out how much interest they can expect to earn by running a few calculations on their own, or by plugging their unique numbers into a ready-made calculator. Consider using the numbers to motivate yourself to tuck away more savings for the future.