Calculating interest is a good idea. It’s helpful to know how much money you’ll build up over time, which allows you to plan for important goals. It’s relatively easy to calculate the interest earned in a savings account – and it’s even easier if you use spreadsheets or calculators.

### How to Calculate Interest you Earn

Interest is the “cost of money.” When you lend money, your borrower needs to repay the loan *plus* (usually) a little bit extra.

That extra amount is interest, or your compensation for letting them use your money.

The same is true when you deposit funds in a bank or credit union. You’re basically lending your money to the bank, and the bank will most likely lend that money to other customers.

To calculate the interest from a savings account, you’ll need to know:

- The amount of your deposit or the amount you lend, using the variable “P” for principal
- When interest is calculated and paid (yearly, monthly, or daily, for example), using “n” for the number of times per year
- The interest rate, using “i” and the rate in decimal format
- How long you’ll earn interest, using “t” for the time in years

**Example:** assume you deposit $100 at the bank, you earn interest annually, and the account pays 5%. How much will you have after one year?

For the most basic calculation, you can use the simple interest formula to solve for the interest amount (I).

That formula is:

**P x r x t = I**

- $100 x 5% x 1 year = $5
- $100 x .05 x 1 year = $5

This calculation would work if your interest rate is quoted as annual percentage yield (APY). Most banks advertise APY: the number looks better (it’s higher), and it’s simpler because it takes compounding into effect. However, you might only know the interest “rate” – and not know the APY.

In that case, if your bank calculates interest monthly and adds earnings to your account monthly (as many banks do), you’ll **need to do a different calculation**.

### Calculate Compound Interest

To calculate compound interest on a savings account, your formula needs to take into account periodic interest payments into the account (if your bank pays interest monthly, for example).

With the same example above, we’ll use the **formula for compound interest **to calculate the ending amount (A):

**A = P (1 + r/n) ^ nt**

If it’s been a while since math class, the caret (^) is for exponentiation, or says a number is raised to the power of another. For example, “x^3” means x cubed (or x raised to the third power).

- A = 100 x (1 + 0.05/12) ^ (12 x 1)
- A = 100 x (1.004167) ^ (12)
- A = 100 X 1.051
- A = 105.117 (or, 105.12 if your bank rounds up)

As you’ll notice, this answer is *slightly* higher than the plain-old $5 of interest earned using simple interest. Because the interest is paid more frequently, you’ll end up with a little bit more.

Of course, your earnings get more impressive as the dollar amounts increase and with longer holding times.

### Calculate with a Spreadsheet

Spreadsheets can automate the process and allow you to make quick changes to your inputs. To calculate your interest earnings with a spreadsheet, us a future value calculation. Microsoft Excel and Google Docs (among others) use the code “FV” for this calculation.

Using our same example, you can enter the following in any cell to figure your earnings using simple interest:

**=FV(0.05,1,0,100)**

If you want to get fancy, enter the rate, time, and principal in separate cells. Then you can refer to those cells from your formula and easily change them for “what-if” calculations.

What if you’re using compound interest (compounded monthly)? You’ll need to convert the annual rate to a monthly rate: 5% divided by 12 months becomes 0.004167. You’ll also convert the number of periods to 12.

**=FV(0.004167,12,0,100)**

### Ongoing Savings

Now, assume you make regular deposits to your account at the end of each month, instead of a single lump-sum deposit. To calculate how much you’ll have after a series of deposits you’ll need another calculation. Or you can use the same spreadsheet calculation – with some adjustments. If you were to deposit $100 per month for the next five years, you’d use:

**=FV(0.004167,60,100)**

Note that you’ve kept the monthly interest rate, and you’ve adjusted the number of periods to 60 months.

To calculate by hand, you’d use the future value of an annuity calculation:

**FV = Pmt * (((1 + r) ^ n) – 1)/r)**

- FV = 100 * (((1 + 0.004167) ^ 60) – 1) / 0.004167)
- FV = 100 * (1.283 – 1) / 0.004167
- FV = 100 * 68.0067
- FV = 6800. 67

Your final answer may vary slightly depending on rounding.