To calculate bank savings account interest, apply the compound interest formula A = P(1 + r/n)nt, where P is your deposit, r is the annual rate as a decimal, n is how many times per year the bank compounds, and t is the number of years. Almost every standard savings account uses compound interest rather than simple interest, so your earnings depend not just on the rate but on how often the bank folds earned interest back into the balance. A $10,000 deposit at 5% compounded monthly grows to $10,511.62 after one year. The same deposit under simple interest earns a flat $500.
The Inputs You Need
Every interest calculation runs on three numbers. The principal is the dollar amount in your account. The interest rate is the annual percentage the bank pays. The time period is how long the money stays deposited. Change any of them and the result changes.
There is a fourth number worth knowing before you reach for a formula: the Annual Percentage Yield, or APY. Under Regulation DD, banks must disclose the APY on every savings account so offers can be compared on equal footing.1eCFR. 12 CFR Part 1030 – Truth in Savings (Regulation DD) The APY already includes the effect of compounding, so it runs slightly higher than the stated interest rate. Two banks might both advertise 5%, but the one compounding daily will post a higher APY than the one compounding quarterly.
Simple Interest
Simple interest is the easier calculation and the shorter answer. Multiply the principal by the rate, then by the number of years:
Interest = Principal × Rate × Time
A $10,000 deposit earning 5% for one year produces $500. For two years, $1,000. The balance in each period’s calculation never changes because earned interest is not added back in. You will see simple interest on some short-term certificates of deposit and promotional features, but not on ordinary savings accounts.
Compound Interest
Compound interest is the formula that applies to most savings accounts. The bank calculates interest, adds it to the balance, and the next calculation runs on the larger number. The formula is:
A = P(1 + r/n)nt
A is your ending balance, P the principal, r the annual rate as a decimal, n the number of compounding periods per year, and t the number of years.
Take $10,000 at 5% compounded monthly for one year. Divide 0.05 by 12 to get the monthly rate of 0.004167. Add 1. Raise the result to the 12th power. Multiply by $10,000. You get $10,511.62. The extra $11.62 over simple interest came from earning interest on interest. Over ten years with no additional deposits, the same account would grow to roughly $16,470. Simple interest would produce only $15,000.
How Compounding Frequency Changes the Result
The n in the formula does more work than many savers realize. Faster compounding means more money, even when the stated rate is identical.
- Daily compounding uses n = 365 and produces the highest yield at a given rate.
- Monthly compounding uses n = 12 and typically aligns with your statement cycle.
- Quarterly compounding uses n = 4.
- Annual compounding uses n = 1 and produces the lowest yield at a given rate.
On a $10,000 deposit at 5%, daily compounding produces about $512.67 in a year. Annual compounding produces exactly $500. The gap widens as the rate rises and as time passes. Over 20 years at 5%, daily compounding yields roughly $27,181 compared with $26,533 under annual compounding.
Using APY to Compare Accounts
Running the compound formula by hand for every account you consider is unnecessary. The APY collapses the rate and the compounding frequency into one comparable figure. Regulation DD sets the formula banks must use:2CFPB. Appendix A to Part 1030 – Annual Percentage Yield Calculation
APY = 100 × [(1 + Interest/Principal)(365/Days in term) − 1]
“Interest” is the dollar amount earned over the term, and “Days in term” is the actual number of days. For a standard savings account without a fixed maturity, the term is 365 days, and the formula simplifies to:
APY = 100 × (Interest / Principal)
If your $10,000 earns $512.67 in a year, the APY is 5.13%. When comparing savings accounts, use the APY and ignore the nominal rate.
Which Balance the Bank Plugs In
The formulas tell you how interest accumulates. The bank also needs a rule for which balance to use in each period’s calculation. Regulation DD allows two methods.3eCFR. 12 CFR Part 1030 – Truth in Savings (Regulation DD) – Section 1030.7
Daily Balance
The bank applies a daily periodic rate to your end-of-day balance each day. A deposit on Wednesday starts earning on Thursday. A withdrawal on Friday reduces Saturday’s calculation. Interest tracks your actual balance day by day.4eCFR. 12 CFR Part 1030 – Truth in Savings (Regulation DD) – Section 1030.2
Average Daily Balance
The bank sums each day’s end-of-day balance across the statement period, divides by the number of days, and applies the periodic rate to that average. A large withdrawal late in the period can drag the average down more than you might expect because it shrinks several days’ balances at once. Check your account agreement to see which method applies.5eCFR. 12 CFR Part 1030 – Truth in Savings (Regulation DD) – Section 1030.4
Tiered Interest Rates
Some savings accounts pay a single rate on all balances. Others use tiers: different rates at different balance levels. A bank might pay 3% up to $10,000 and 4% above that. How the tiers are applied changes what you earn, and Regulation DD recognizes two approaches.6eCFR. 12 CFR Part 1030 – Truth in Savings (Regulation DD) – Appendix A
Whole Balance (Tiering Method A)
The bank pays the rate for your current tier on your entire balance. With $15,000 in an account where the top tier starts at $10,001 and pays 4%, you earn 4% on all $15,000. Each tier has one fixed APY.
Split Balance (Tiering Method B)
The bank pays each tier’s rate only on the portion of your balance that falls within that tier. With $15,000, you earn 3% on the first $10,000 and 4% on the remaining $5,000. The effective APY shifts with your balance, so banks must disclose a range of APYs for every tier above the first.7CFPB. 12 CFR 1030.4 Account Disclosures When you compare tiered accounts, check which method applies. Whole-balance tiering can pay noticeably more once you cross a threshold.
A Quick Estimate: The Rule of 72
If you want a rough sense of how long your money takes to double, divide 72 by the annual rate. At 4%, the doubling time is about 18 years. At 6%, about 12. The approximation holds best between roughly 2% and 12%. It will not match the compound formula to the penny, but it is a fast way to tell whether a given rate is doing meaningful work.
What You Actually Keep
The formulas above give you gross interest. Three things sit between that number and the money that stays in your pocket.
Fees
A monthly maintenance fee can erase everything a small balance earns. A savings account paying 2% APY on $1,000 produces about $20 in a year; a $5 monthly fee costs $60. Regulation DD requires banks to disclose fees and to note in any APY advertisement that fees could reduce earnings.8eCFR. 12 CFR Part 1030 – Truth in Savings (Regulation DD) – Section 1030.8 Many banks waive the fee if you keep a minimum balance, often $100 to $500, and online-only banks frequently charge nothing. Subtract any fee you would realistically pay before judging an APY.
Taxes
Savings interest is taxable as ordinary income under federal law. The Internal Revenue Code counts interest in gross income, so it adds to your wages when the tax bill is calculated.9Office of the Law Revision Counsel. 26 USC 61 – Gross Income Defined Your rate depends on your taxable income and filing status; for tax year 2026, federal marginal rates run from 10% to 37%.10IRS. IRS Releases Tax Inflation Adjustments for Tax Year 2026 A bank that pays you $10 or more in interest in a year must send you a Form 1099-INT and report the same amount to the IRS.11IRS. About Form 1099-INT, Interest Income Interest below $10 is still reportable even without the form.12IRS. Publication 550, Investment Income and Expenses In the 22% bracket, a 5% APY is roughly 3.9% after federal tax, before any state income tax.
Inflation
The real return on your savings is the nominal rate minus the inflation rate. At 4% APY with 3% inflation, your purchasing power grows by about 1%. When inflation exceeds the APY, the dollar balance rises while buying power falls. Comparing your APY to the current inflation rate tells you whether the account is building wealth or holding ground.