A savings account is a fundamental financial tool designed to help individuals set aside money for future goals, emergencies, or simply to build wealth. The primary benefit of a savings account, beyond secure storage, is the interest it earns. Interest is essentially the cost of borrowing money, but in the context of a savings account, it's the reward you receive from the bank for depositing your funds with them.
Banks use the money deposited by customers to lend out to other customers (e.g., for mortgages or business loans). They pay a portion of the interest they earn from these loans back to depositors as an incentive to keep money in their accounts. This process is known as earning interest.
The Compound Interest Formula
The most powerful aspect of savings account interest is compounding. Compound interest means that the interest earned in each period is added to the principal, and then the next interest calculation is based on this new, larger principal. This creates a snowball effect, where your money grows at an accelerating rate over time.
The formula used to calculate the future value of an investment with compound interest is:
A = P (1 + r/n)^(nt)
Where:
A = the future value of the investment/loan, including interest
P = the principal investment amount (the initial deposit)
r = the annual interest rate (as a decimal)
n = the number of times that interest is compounded per year
t = the number of years the money is invested or borrowed for
Our calculator uses this formula to project your total savings. For example, if you deposit $1,000 (P) at an annual interest rate of 5% (r = 0.05), compounded monthly (n = 12) for 10 years (t), the calculation would be:
A = 1000 * (1 + 0.05/12)^(12*10)
A = 1000 * (1 + 0.00416667)^(120)
A = 1000 * (1.00416667)^(120)
A = 1000 * 1.647009
A ≈ $1,647.01
The total interest earned would be A – P, which is $1,647.01 – $1,000 = $647.01.
Why Use This Calculator?
Planning for Goals: Estimate how much your savings will grow for down payments, education, or retirement.
Comparing Accounts: See the potential earnings from different savings accounts with varying interest rates and compounding frequencies.
Understanding Growth: Visualize the power of compound interest and how time impacts your savings.
Financial Literacy: Gain a clearer understanding of basic financial concepts.
By inputting your initial deposit, desired interest rate, investment period, and compounding frequency, you can quickly see the potential future value of your savings. This tool empowers you to make informed decisions about where to keep your money and how to maximize its growth.
function calculateInterest() {
var principal = parseFloat(document.getElementById("principal").value);
var annualRate = parseFloat(document.getElementById("annualRate").value);
var years = parseFloat(document.getElementById("years").value);
var compoundingFrequency = parseInt(document.getElementById("compoundingFrequency").value);
var resultValueElement = document.getElementById("result-value");
if (isNaN(principal) || isNaN(annualRate) || isNaN(years) || isNaN(compoundingFrequency)) {
resultValueElement.textContent = "Invalid input";
return;
}
if (principal < 0 || annualRate < 0 || years < 0) {
resultValueElement.textContent = "Inputs cannot be negative";
return;
}
var ratePerPeriod = annualRate / 100 / compoundingFrequency;
var numberOfPeriods = compoundingFrequency * years;
var futureValue = principal * Math.pow((1 + ratePerPeriod), numberOfPeriods);
// Format to two decimal places for currency
var formattedFutureValue = futureValue.toFixed(2);
resultValueElement.textContent = "$" + formattedFutureValue;
}