The basic formula: multiply your balance by the rate, then divide by the number of days in a year

To find out how much interest a savings account will pay you, you need three numbers: your account balance, the annual percentage yield (APY), and the number of days your money sits in the account. The formula is straightforward: balance × APY ÷ 365 = annual interest. If you want to know what you'll earn in a month or a week, divide that annual number by 12 or 52.

Here's a concrete example. Say you have $5,000 in a savings account with a 4.5% APY. Multiply $5,000 by 0.045 (that's 4.5% as a decimal), which gives you $225. That's what the account will pay you over a full year if your balance stays at $5,000 and the rate doesn't change. If you want to know monthly interest, divide $225 by 12, which is $18.75 per month.

The catch is that most savings accounts use daily compounding, which means the bank calculates interest on your balance every single day, and then adds that interest back into your account so tomorrow's interest is calculated on a slightly larger balance. The formula above gives you the straightforward annual interest, but compounding makes the actual amount slightly higher.

Key Takeaways

  • straightforward annual interest is balance × APY ÷ 365; multiply by the number of days your money is in the account to find interest earned over a specific period.
  • Most savings accounts compound daily, meaning interest is calculated and added to your balance every day, so you earn slightly more than the straightforward formula shows.
  • To compare two accounts fairly, look at the APY, not the interest rate, because APY already includes the effect of compounding.
  • Your actual earnings depend on whether your balance changes during the month; banks recalculate daily, so deposits and withdrawals shift what you earn.

Why APY matters more than the stated interest rate

Banks sometimes advertise an interest rate and an APY as two different numbers. The interest rate is the raw percentage the bank pays. The APY is that rate plus the effect of compounding—the interest you earn on your interest. For savings accounts, APY is always higher than the stated rate, and it's the number you should use to compare accounts.

For example, a bank might advertise a 4.4% interest rate with a 4.5% APY. The difference is small, but it adds up. If you use the 4.4% rate in your calculation, you'll underestimate what you actually earn. Always look for the APY on the account disclosure or the product page before you calculate.

How daily compounding changes your earnings

With daily compounding, the bank divides the annual APY by 365 to get a daily rate, then applies that rate to your balance each day. On day one, you earn a tiny fraction of your APY. That interest gets added to your account. On day two, the bank calculates interest on your original balance plus the interest from day one. This repeats every day.

The difference between straightforward interest and compounded interest is small over short periods but meaningful over a year. Using our $5,000 example at 4.5% APY: straightforward interest gives you $225. With daily compounding, you'd earn about $230.68 over the year. The extra $5.68 comes from earning interest on your interest.

To calculate compounded interest precisely, use this formula: final balance = starting balance × (1 + APY ÷ 365)^365. The "^365" means you multiply the number in parentheses by itself 365 times. Most people use a calculator or spreadsheet for this rather than doing it by hand. If you're comparing accounts, though, the APY already includes compounding, so you don't need to do this calculation yourself—the bank has already done it.

What happens when your balance changes mid-month

Banks recalculate interest daily based on your current balance, so deposits and withdrawals change what you earn. If you deposit $2,000 on the 15th of the month, that $2,000 only earns interest for the remaining days of the month, not the whole month.

Here's how it works in practice: say you start the month with $5,000 at 4.5% APY. For the first 15 days, you earn interest on $5,000. On day 16, you deposit $2,000, so for the remaining 15 days, you earn interest on $7,000. The bank adds up the daily interest from all 31 days to get your monthly total. This is why the exact amount you earn varies month to month if your balance isn't stable.

Using a spreadsheet to track interest over time

If you want to see how your savings will grow over months or years, a spreadsheet makes the math automatic. Set up three columns: date, balance, and interest earned. In the interest column, use the formula =balance × APY ÷ 365. Add that interest to your balance for the next row. Copy the formula down for as many months as you want to project.

This method shows you the real effect of compounding over time. You'll see that in month one you earn less interest than in month 12, even if your balance is the same, because month 12's interest is calculated on a balance that already includes 11 months of accumulated interest. Most banks also provide an interest calculator on their website, which does this work for you—you enter your starting balance and the APY, and it shows you what you'll have after a year.

The difference between stated APY and what you actually receive

The APY a bank advertises is only may provide if your balance and the rate stay the same for the full year. In reality, rates change. A bank can lower your APY at any time, though they must notify you first. If rates drop, your earnings drop with them. If you move money in or out, your balance changes and so does your interest.

Banks also sometimes offer promotional rates that explore only to new money or for a limited time. Read the account terms carefully to see whether the APY you're looking at applies to your whole balance or just deposits made in a certain window. A promotional 5% APY on the first $25,000 is very different from a 5% APY on your entire balance.

Comparing savings accounts using the same calculation

To compare two accounts fairly, calculate the annual interest for the same balance at each account's APY. Use the straightforward formula: balance × APY ÷ 365 × 365 (the last multiplication by 365 cancels out the division, giving you annual interest). Or just multiply balance × APY directly.

Say Account A offers 4.5% APY and Account B offers 4.25% APY. On a $10,000 balance, Account A pays $450 per year and Account B pays $425 per year. The difference is $25 annually. If you have $50,000, the difference grows to $125 per year. Over time, the higher rate compounds into noticeably more money, so it's worth shopping around, especially if you're moving a large balance.

Frequently Asked Questions

Do I need to do this calculation myself, or does the bank do it for me?

The bank calculates and deposits interest into your account automatically. You don't have to do anything. Understanding the calculation helps you predict what you'll earn and compare accounts, but the bank handles the actual math and deposits.

What's the difference between APY and APR?

APY (annual percentage yield) includes compounding and is used for savings accounts. APR (annual percentage rate) does not include compounding and is used for loans and credit cards. For savings, always use APY to calculate what you'll earn.

If I withdraw money mid-month, do I lose all the interest I earned?

No. You keep the interest you've already earned up to the day you withdraw. The bank calculates interest daily, so you earn a proportional amount based on how long your money was in the account. Some accounts have penalties for early withdrawal, but that's a separate issue from interest calculation.

Why does my actual interest sometimes differ from what I calculated?

The most common reason is that your balance changed during the month. If you deposited or withdrew money, the daily interest calculation shifts. Also, if the bank changed the APY during the month, part of your interest was earned at the old rate and part at the new rate. Check your statement to see the exact dates rates changed.

Can I use this formula for money market accounts or CDs?

Yes. The same APY formula works for any savings product that compounds daily. The main difference with CDs is that you can't withdraw money early without a penalty, but the interest calculation itself is identical.