How to Calculate Interest on a Savings Account

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Calculate Interest on a Savings Account
3 min
16-April-2024

Savings accounts are the most popular form of banking. It offers a haven for your money while also providing you with a potential return through interest. But how much interest are you actually earning on your savings? Understanding how to calculate your savings account interest can help you make informed decisions about your finances.

Also read: Senior Citizen Savings Scheme

Savings account interest

Savings accounts offer a simple way to earn interest on your deposited funds. The interest rate is a percentage of the money you have in your account, typically calculated and credited on a monthly or quarterly basis. There are two main types of interest earned on savings accounts:

  • Simple Interest: This is the most basic form of interest calculation. The interest earned is based solely on the principal amount (initial deposit) and the interest rate, for the time period the money is deposited.
  • Compound Interest: While less common in savings accounts, some may offer compound interest. Here, the interest earned is calculated not just on the principal amount but also on any accumulated interest from previous periods. This results in a slightly higher overall interest earned over time.

If you are looking for a safe investment option, you can consider fixed deposit. They offer guaranteed returns and a fixed interest rate throughout your investment tenure.

Also read: Alternatives to a savings account

How to calculate interest earned on a savings account

You can use an online savings account interest calculator to determine how much interest on a savings account can be earned. Alternatively, you can use formulas to calculate your interest on a savings account:

  1. P x R x N = Simple interest earned
  2. [P (1 + R)^N] – P = Compound interest earned

Where:

P is your principal balance

R is the interest rate (in decimal)

N is the number of time periods (typically expressed in years)

Also read: National Savings Scheme

How much interest can you earn based on your balance

The amount of interest you can earn depends on factors such as the interest rate offered by a bank and the balance you maintain in your account. Banks typically provide interest rates as a percentage of your balance amount. The higher your balance and the higher the interest rate, the more interest you can earn. Hence, it is essential to check with your bank their current rates and policies.

For instance, some banks offer tiered interest rates, where higher balances earn higher interest rates. Moreover, compounding allows your interest earnings to earn additional interest over time, potentially increasing your overall returns.

Ways to earn more interest

It is essential to understand how banks calculate interest on savings accounts. Here are some ways that can help you earn the highest possible interest rate on your savings:

  • Explore money market accounts: Depending on the bank, money market accounts can provide higher yields than standard savings accounts if you can meet the minimum deposit requirements.
  • Consider a high-yield savings account: While not every bank offers one, a high-yield savings account can rapidly increase your interest earnings.
  • Make regular deposits: Consistently adding to your savings account can steadily increase the interest you earn over time.
  • Use idle funds efficiently: The sweep-in and sweep-out benefits of a savings account ensure idle funds can be swept out to a fixed deposit account, offering a high rate of return.
  • Consider age-based savings accounts: Different types of savings accounts are designed for different age groups, such as children, youth, and senior citizens. Such savings accounts tend to offer a higher interest rate than a standard one.
  • Earn indirect earnings through standard interest credits: When you have an adequate balance in your savings account, you can use your monthly interest credit for other investments. For instance, you can opt for SIPs and have the interest income deposited every month. Interest income earns higher returns through fund schemes that are actively managed by experts.
  • Look for trusted banks to open a savings account: Choose a bank that offers a high interest rate on your savings account. However, keep an eye out for high maintenance charges that some banks levy on high interest-bearing accounts.

If you want to diversify your investment portfolio, you can consider a stable investment option like Fixed Deposit. Some financial institution like Bajaj Finance offers flexible tenure on their FD such as monthly, quarterly, half yearly and annually. Bajaj finance offers one of the highest FD rates of up to 8.85% p.a. for senior citizens (above the age 60) and up to 8.60% p.a. for individuals below the age of 60.

Bottom line

Knowing what is interest on a savings account and how to calculate different forms of interest can help you optimise your savings and grow your balance over time. This can easily be done using a savings bank interest calculator online. It is also essential to explore and compare different bank accounts to receive the best rate possible based on your opening deposit and maximise your payout.

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Frequently asked questions

Is my money safe in an online savings account?

Yes, online savings accounts are just as safe as traditional ones, though some may have more security features than others. Before opening an account with a bank, ensure that it has appropriate security measures in place to protect your finances, such as multi-factor authentication, encryption, or tokenisation.

What’s the point of saving when APYs are lower than the inflation rate?
While the interest rates on savings accounts do not always keep up with inflation, they still serve as a secure way to save money and make it accessible for future expenses or emergencies. Inflation may not be a huge concern for short-term goals, as savings accounts are great for holding cash for short-term liquidity needs.
Why do interest rates for online savings accounts trend higher than at brick-and-mortar banks?
Unlike traditional banks, one of the main advantages of online savings accounts is that they do not have to incur significant infrastructure and overhead costs. This allows them to pass on the savings to their customers, which translates into higher rates of interest.

Disclaimer

As regards deposit taking activity of Bajaj Finance Ltd (BFL), the viewers may refer to the advertisement in the Indian Express (Mumbai Edition) and Loksatta (Pune Edition) furnished in the application form for soliciting public deposits or refer https://www.bajajfinserv.in/fixed-deposit-archives
The company is having a valid Certificate of Registration dated March 5, 1998 issued by the Reserve Bank of India under section 45 IA of the Reserve Bank of India Act, 1934. However, the RBI does not accept any responsibility or guarantee about the present position as to the financial soundness of the company or for the correctness of any of the statements or representations made or opinions expressed by the company and for repayment of deposits/discharge of the liabilities by the company.

For the FD calculator the actual returns may vary slightly if the Fixed Deposit tenure includes a leap year.