Savings Account Interest Calculator

What is Savings Account Interest?

Savings account interest is the money a bank pays you for keeping your funds in their savings account. It's essentially a reward for allowing the bank to use your money for other purposes, such as lending to other customers.

The Compound Interest Formula

The formula for calculating compound interest in a savings account is:

\[A = P(1 + \frac{r}{n})^{nt}\]

Where:

• \(A\) = Final amount
• \(P\) = Principal amount (initial deposit)
• \(r\) = Annual interest rate (in decimal form)
• \(n\) = Number of times interest is compounded per year
• \(t\) = Number of years

Step-by-Step Savings Account Interest Calculation

1. Identify the principal amount (P), annual interest rate (r), compounding frequency (n), and time period (t).
2. Convert the annual interest rate to decimal form (divide by 100).
3. Determine the number of compounds per year based on the compounding frequency.
4. Plug these values into the compound interest formula.
5. Calculate the final amount (A).
6. Subtract the principal from the final amount to get the interest earned.

Example Calculation

Let's calculate the savings account interest for an initial deposit of $1,000, an annual interest rate of 2%, compounded monthly, over 5 years:

1. \(P = \$1,000\), \(r = 2\% = 0.02\), \(n = 12\) (monthly compounding), \(t = 5\) years
2. \(A = 1000(1 + \frac{0.02}{12})^{12 \times 5} = \$1,104.94\)
3. Interest earned = \$1,104.94 - \$1,000 = \$104.94

Visual Representation

The green portion represents the initial deposit ($1000), and the blue portion represents the interest earned ($104.94) over the 5-year period.