Simple interest is easy to calculate: Your interest is the principal multiplied by the interest rate multiplied by the time period.
For example, if you have $1000 in a savings account with an interest rate of 3% for 1 year:
$1000 (principal) * .03 (interest rate) * 1 (time period) = $30
However, most people want to understand compound interest when calculating how much they can earn on their savings account. Savings accounts typically earn compounded interest, or interest that builds upon itself and grows over time. Calculating compound interest is a bit trickier than calculating simple interest. You can calculate daily compound interest over the course of a year with the formula:
A=P(1+r/n)^nt
Where
A = Final sum of interest and principal
P = Principal
r = Interest rate as a decimal value (for example: 2.00% would be 0.02)
n = Number of times interest is compounded in a time frame
t = Time frame
How much should you keep in a savings account?
How much you should keep in a savings account depends on your financial goals, as well as any monthly service fees you may be trying to avoid.
Common uses for savings accounts include:
- An emergency fund — Many experts recommend 3-6 months of savings in case of emergencies.
- A vacation — Saving for an upcoming vacation can prevent credit card debt after the fact.
- A major life event — Getting ready for a down payment? A wedding? A new addition to the family? All of these are great reasons to add to your savings.
You will want to keep a high enough balance in your account to avoid any monthly service fees, which are charged by some banks.
How much should I add to my savings account each month?
There's no one-size-fits-all answer to this question. However, it's generally a good idea to try to save consistently.
A popular budget, the 50/30/20 rule, suggests that you budget 50% of your income for needs (like rent and groceries), 30% for wants (like concerts and going to the movies) and 20% for savings and debt payments (like your 401(k) and student loans). Keep in mind that, with the 50/30/20 rule, the full 20% probably won’t go directly into your savings account – it may go toward things like your retirement savings, student loan payments or credit card debt.
How much you want to save will also depend on any financial goals you might be working toward. For example, if you’re trying to save for a new car or want to take a dream vacation in the next year, your savings strategy will likely differ. You may want to save for these purchases while continuing to build your emergency fund.
Our collection of financial products can help you create a brilliant future. Learn more.
This article is for general educational purposes. It is not intended to provide financial or tax advice. It also is not intended to describe or indicate the availability of any Citi product or service. You should refer to the terms and conditions financial institutions provide for various products. Please consult your tax advisor with any tax questions. Citi is not a tax advisor.
