The primary purpose of a savings account is to accrue interest. Interest is a fee that your financial institution pays you for the use of money in your savings account. You will need to know the interest rate, initial balance, and time that the money is in the savings account to calculate the interest that a savings account will accrue.
Activity
A savings account typically has a very low level of activity compared to a checking account. The accrual of interest will frequently be the only activity on the savings account. In this case, the calculation of interest is relatively straightforward.
Annual Percentage Rate
The annual percentage rate (APR) is essentially the percentage by which the money in the savings account will increase by in one year. This increase is due to the accrual of interest. Financial institutions generally provide the interest rate on a savings account as the APR.
Annual Interest Rate
The annual interest rate is the APR expressed as a decimal fraction. You can convert the APR to the annual interest rate simply by dividing by 100 or shifting the decimal point two places to the left. For example, an APR of 5 percent is equal to an annual interest rate of 5/100 or 0.05.
Compounding Period
The compounding period is the frequency at which the interest is compounded. A financial institution will typically compound the interest annually, but some savings accounts may compound interest quarterly or even monthly.
Calculations
The compound interest on a savings account may be calculated with the following equation: I = B x (1 + r / n)^(Y x n) - B. "I" is the interest, "B" is the balance in the savings account at the beginning of the calculation period and "r" is the annual interest rate of the account. The number of compounding periods in a year is given by "n" and the length of the calculation period in years is given by "Y."
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