Simple interest is easy to calculate: your interest is the principal multiplied by the interest rate multiplied by the number of time intervals.
However, what most people want to know when calculating their savings account interest over time is compound interest, or how that interest will build upon itself and grow over time. Calculating compound interest is a bit trickier than calculating simple interest. You can calculate monthly compound interest over the course of a year with the formula:
A=P(1+r/n)^nt
Where
A = Final sum
P = Principal
r = Interest rate
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 — 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 bank accounts.
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 tax‑advantaged retirement savings account, 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.
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