How much interest will I earn from a savings account?
Growing your savings account is an essential part of a good financial plan. Having ample savings means being able to take vacations, buy a new car, and enjoy the security of knowing you have enough money in the bank to cover you in case of a job loss or medical emergency. For this reason, most people ask, "How much interest will I earn on a savings account?" Many people would also like to learn how to calculate interest on a savings account. There are two ways that interest is calculated, simple interest and compound interest, which we will discuss in detail.
Read-on to learn more about how to calculate interest on a savings account.
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Types of savings account interest
There are two methods for calculating interest on a savings account:
Simple interest. This interest is earned based on the original deposit amount (principal amount). It does not include the interest the balance earns over time.
Compound interest. This type of interest is earned based on the original deposit amount plus interest already earned. In this way, the account interest earns interest, which helps savings grow faster.
How to calculate simple interest
To calculate simple interest, use the following formula: principal amount x the annual interest rate x the number of years you will have the account.
For example, if you have $1,000 in your savings account which earns 5% interest.
$1,000 x 5% (0.05) x 1 year = $50 in interest per year.
How to calculate compound interest
Using the example above, your $1,000 savings account balance with a 5% annual interest rate earned you $50 the first year, increasing your balance to $1,050.
In a savings account that earns compounded intertest, you’ll earn 5% annual interest on the $1,050 ($1,050 x 0.05 = $52.50). The interest is added to your balance $1,050 + $52.50 = $1,102.50.
How does simple interest compare to compound interest
When it comes to growing your savings and earning interest from a savings account, you may want to consider opening accounts that pay compound intertest which will earn more over time than accounts paying simple interest. It's important to keep your unique financial situation in mind when you think about the savings account options and compare savings account interest rates.
The IRS considers interest a person receives from certain bank accounts to be
interest income that is subject to income tax. All interest income is taxable unless specifically excluded. Examples of tax-exempt interest income may include certain retirement savings accounts, and interest income earned from bonds issued by states, cities, or counties and the District of Columbia.
Earning interest on a savings account could put you into a higher tax bracket, meaning you could pay more tax on your income. For this reason, it is recommended you speak to your tax preparer or financial advisor regarding the effect of earned interest on your taxes.
How to grow your savings fast
Here are some of the most common ways to build your savings quickly:
Open a high-yield savings account. There are several different types of savings account, each created to help people reach certain goals, such as saving for retirement and saving to buy a home. High-yield savings, also known as interest-bearing savings, are popular because the more money you keep in savings, the more interest you’ll earn.
Watch for opportunities to increase your interest rate. Credit unions, banks, and online offer promotional interest rates as well as special interest rates on certificates of deposit (CDs), share certificates, money market accounts, and other types of accounts. If members of your family all use the same financial institution you may be able to receive higher interest rates based on relationship banking, even if you have separate accounts.
Set up automatic transfers. Most credit unions and banks provide free automatic transfers, which let you transfer money into your savings account on a monthly basis from another account, such as your checking account. Automating your savings helps you build savings and you'll be surprised how the money adds up over time.
FAQs
When is savings account interest calculated?
Calculating savings account interest depends on the type of account, interest may be calculated daily, monthly, quarterly, or yearly.
How do I earn more interest in a savings account?
The amount of interest your account can earn depends on several factors including the type of account you choose, the amount of money you deposit, the interest rate, and how the interest is calculated by the financial institution. Show around and compare rates on high-yield savings accounts, CDs/share certificates, money markets, and other savings options.
How much interest will $5,000 earn in a savings account?
The amount of interest your money can earns depends on the interest rate and whether the account pays simple interest or compounded interest. Use this savings growth calculator to see how your savings can grow.
How do I choose the right savings account?
The account you choose should fit your financial needs. Most people have a traditional savings account or a high-yield savings account. Other savings products, such as CDs/share certificates require that the money not be withdrawn for a specific period of time. Speak to a credit union or bank representative to learn about your savings options.
What are some alternatives to savings accounts?
Some alternatives to traditional savings accounts include retirement savings accounts, such as Roth IRAs, traditional IRAs, and employer sponsored 401(k)s.
Why savvy consumers choose CU SoCal
For over 60 years CU SoCal has been providing financial services, including mortgages, Home Equity Loans, HELOCs, car loans, personal loans, credit cards, and other banking products, to those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County.
Please give us a call today at 866.287.6225 today to schedule a no-obligation loan consultation with a CU SoCal Member Services specialist.
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