When you’re considering opening a savings account (or even after you already have one), making sense of interest rates can be a little confusing. While it may be clear that savings accounts are a secure method to earn a little interest without the risk, calculating how much you’re earning isn’t an easy equation.
Our easy-to-use online calculator can help you crunch the interest rate numbers. And along the way, we will also help you demystify all the need-to-know terms surrounding savings interest.
What is a savings interest calculator?
Our Savings Interest Calculator is a tool to help you figure out how much money you will earn in a year on the funds in your interest-earning Online Savings Account. Just enter your current balance and any annual percentage yield (APY), and you can compare how different APYs affect your annual earnings (assuming you don’t make any withdrawals).
Earning interest helps you grow your savings. Some reasons why having an interest-earning savings account is essential for your financial health include:
For an emergency fund specifically, it’s a good idea to have at least three to six months’ worth of your essential expenses saved. Our savings interest calculator helps calculate how much money your emergency fund savings will accrue on top of how much you have deposited. Hopefully, you won’t have an emergency and your money can remain deposited. And the longer the money stays in your account, the more you will accrue in interest.
Terms of Interest
Knowing how much interest you could earn can be a great way to get motivated to save. It’s also a great way to stay motivated throughout your savings journey. When calculating your potential return, it’s good to understand the following concepts. They will help you understand how interest rates work and how much you could save over time:
- Interest rate: the percentage rate of return an account will yield after a certain period. In simplest terms, saving an initial principal of $2,000 with the interest rate of 1% per year would return $20 for a total of $2,020 at the end of the year.
- Compound interest (compounding rate): your initial deposit earns interest, then each time your interest compounds, you earn interest on the principal and on the interest you’ve already accrued.
- Compounding period: the time between when interest was last compounded and when it will be compounded again. Interest can be compounded daily, monthly, quarterly, or annually. The more often interest compounds, the faster your money grows. At Ally Bank, we compound interest daily, giving your savings an advantage over deposit accounts that compound interest just quarterly or annually.
- APY (annual percentage yield): your effective annual interest rate, including compounding interest, dictates how much you will effectively earn on a savings account over one year.
Why is calculating savings interest so significant?
The impact earning interest on your savings over time isn’t always clear from the start.
Take this scenario: Let’s say you make a pre-tax yearly income of $50,000. If you were to take 2% of it and deposit it in an interest-earning account, you would make an initial deposit of $1,000. Continue setting aside this amount for five years in an account with an APY of 0.80%, and you would end up with $6,163 (provided you don’t withdraw funds during that time) — with $163 earned in interest. Saving 2% of your income may feel insignificant, but over time, the returns you make from compound interest could significantly impact your net worth.
What to Look for in a Savings Account
Start by opening a savings account that offers a competitive interest rate. Online banks like ours can offer this since we don’t have the operating costs of maintaining physical branches.
Some other characteristics of a savings account to look for:
- Variable APYs with long-term averages generally higher than the national average
- No monthly maintenance fees
- Interest that compounds daily
- Insured by the FDIC (you’ll be protected up to the maximum allowed by law for each single-name account)
- No account minimums for opening or to earn interest
Related: How Does a Savings Account Work?
How can you boost your savings even more?
Now that you’ve calculated how much interest you can earn, and a great spot to deposit your money, you might want to also:
- Set up recurring transfers, which automate the deposits into your savings account and are great way to reach your savings goals by “paying yourself first.”
- Utilize Surprise Savings and buckets in our Online Savings Account to accelerate your ability to save.
- Make a savings plan to build your account balance and follow it. Our Savings Goal Calculator can help.
- And if you’re thinking saving is a big lift right now, consider getting started with a microsaving
Saving with us pays off. See what you can earn with us today!