Savings accounts are a fundamental tool for growing your money over time. They offer a secure place to store funds while earning a return through interest. The interest you earn is essentially the bank's way of rewarding you for keeping your money with them. Understanding how this interest is calculated is crucial for making informed financial decisions and choosing the best savings options.
The Compound Interest Formula
The most common way interest is calculated on savings accounts is through compound interest. This means that not only does your initial deposit (the principal) earn interest, but the accumulated interest also starts earning interest itself. This snowball effect can significantly boost your savings over the long term.
The formula for 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 determine the future value of your savings. The total interest earned is then calculated as Interest = A - P.
Key Terms Explained:
Principal (P): The initial amount of money you deposit into the savings account.
Annual Interest Rate (r): The percentage of the principal that you will earn in interest over a year. This is usually expressed as a decimal in the formula (e.g., 5% becomes 0.05).
Compounding Frequency (n): How often the interest is calculated and added to your principal. Common frequencies include annually (n=1), semi-annually (n=2), quarterly (n=4), monthly (n=12), and daily (n=365). More frequent compounding generally leads to higher earnings over time, assuming the same annual rate.
Time Period (t): The duration, in years, that your money remains in the savings account.
Why Use This Calculator?
This calculator helps you:
Estimate how much your savings will grow over time.
Compare different savings accounts based on their interest rates and compounding frequencies.
Understand the impact of starting early and contributing consistently.
Visualize the power of compound interest.
By inputting your initial deposit, the expected annual interest rate, the time period you plan to save, and how often the interest is compounded, you can get a clear projection of your future savings balance and the total interest earned. This empowers you to make smarter choices for your financial future.
function calculateInterest() {
var principal = parseFloat(document.getElementById("principal").value);
var annualRate = parseFloat(document.getElementById("annualRate").value);
var time = parseFloat(document.getElementById("time").value);
var compoundingFrequency = parseFloat(document.getElementById("compoundingFrequency").value);
var resultDiv = document.getElementById("result");
if (isNaN(principal) || isNaN(annualRate) || isNaN(time) || isNaN(compoundingFrequency)) {
resultDiv.innerHTML = "Please enter valid numbers for all fields.";
resultDiv.style.backgroundColor = "#ffc107"; // Warning yellow
resultDiv.style.color = "#333";
resultDiv.style.display = "block";
return;
}
if (principal <= 0 || annualRate < 0 || time <= 0 || compoundingFrequency <= 0) {
resultDiv.innerHTML = "Please enter positive values for principal, time, and compounding frequency, and a non-negative rate.";
resultDiv.style.backgroundColor = "#ffc107"; // Warning yellow
resultDiv.style.color = "#333";
resultDiv.style.display = "block";
return;
}
var rateDecimal = annualRate / 100;
var amount = principal * Math.pow(1 + rateDecimal / compoundingFrequency, compoundingFrequency * time);
var totalInterest = amount – principal;
var formattedAmount = amount.toFixed(2);
var formattedInterest = totalInterest.toFixed(2);
resultDiv.innerHTML = "$" + formattedAmount + " Total Balance$" + formattedInterest + " Total Interest Earned";
resultDiv.style.backgroundColor = "var(–success-green)";
resultDiv.style.color = "var(–white)";
resultDiv.style.display = "block";
}