How to Calculate Savings Account Interest

Key insights:

• Savings accounts earn an annual percentage yield (APY), which is the rate of interest they earn each year
• Interest from a savings account typically compounds, though your APY can change over time
• The amount of money you deposit into a savings account depends on factors like your goals, income, and other financial obligations and minimum balance requirements

Savings accounts can be useful tools for pursuing your financial goals, but you may be wondering how much you’ll earn monthly and yearly with the money in your savings account. The answer depends on several factors, such as your account's annual percentage yield (APY), how much you have deposited and what you contribute (or withdraw) over time.

Let's explore how savings account interest works, how to calculate it and how to set smart savings goals.

What is a savings account's APY?

Your savings account's APY is the interest you earn yearly. The higher the APY, the more you’ll earn. APY accounts for compounding interest – interest you earn that’s added to the principal.

Simple vs. compound interest 

Simple interest is calculated only on the principal amount assuming no change in rate and does not reflect compounding. Whereas compound interest is calculated on the principal amount and accumulated interest from previous periods. Interest may compound daily, monthly, quarterly or even annually. Savings accounts typically earn compound interest.

How to calculate savings account interest

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, when it comes to savings accounts, it's important to understand how interest can build upon itself over time. While 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 following 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

You may also use a compound interest calculator to understand how much interest your account may earn. Just keep in mind that your APY may change over time, which can affect your potential interest earnings. Withdrawing or depositing money over time would also impact how much interest your account will earn.

How much should you keep in a savings account?

The amount of money you keep in a savings account depends on your financial goals, as well as any monthly service fees you may want to avoid.

Common uses for savings accounts include:

• An emergency fund: Many experts recommend 3 to 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 sufficient 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. Many savings accounts let you set up automatic transfers, or you may be able to have part of your paychecks deposited directly into your savings account.

To figure out how much to save each month, you may start with a guideline like the 50/30/20 rule. That method suggests budgeting 50% of your income for essentials (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). 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. However, the 50/30/20 rule can help you set a baseline for your savings goals.

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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Disclosure: This article is for general educational purposes. It is not intended to provide financial advice. It also is not intended to completely describe any Citi product or service. You should refer to the terms and conditions financial institutions provide for various products