How is the interest of a savings account calculated?

I am going to open a saving account soon, and I really don%26#039;t understand the whole interest thing. The bank offers and 0.5% interest rate. It is compounded daily. Let%26#039;s say I put $1000 in the account tomorrow. When will I actually see the interest in my account, and how much would it be. Any advice is much appreciated. Thanks!

How is the interest of a savings account calculated?loans uk

The interest will be computed on a daily basis, and you%26#039;ll earn interest on the previous day%26#039;s interest (i.e. %26quot;compounded daily%26quot;). The bank will credit your account the interest on a monthly basis. The 0.5% interest rate is an annual number, so you will have to calculate the amount for a daily basis. Here%26#039;s the quick math for your daily interest on $1000:

Day1: 1000 * 0.005 / 365 = 0.0137

Day2: (1000 + Day1) * 0.005 / 365 = 0.0137

In general terms, the formula for calculating interest for %26quot;n%26quot; days on your $1000 at 0.5% is:

n days of interest = 1000 * (((1 + 0.005 / 365) ^ n) - 1)

*Response to Taranto (below):

Regarding the use of 360 or 365 for computing interest, check with your bank on how they do the math. The %26quot;Actual/360%26quot; accrual that Taranto mentions is used to compute interest accruals on money market rates. However, the following is an excerpt from JPMorgan Chase%26#039;s Web site on compounding:

%26quot;Banks and financial institutions routinely use compounding to pay you a higher interest rate. For example, a bank may be offering a CD that pays interest at 10%. If the bank does not compound interest, you will receive 10 percent of your investment as interest income at the end of a year. But if the bank compounds interest every three months (quarterly compounding), you will earn an interest rate of 10.38%. If the bank compounds interest monthly, you will earn 10.47%. And if it compounds daily, you will earn 10.52%.%26quot;

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In the daily compounding example, if you use 360 you get 10.67%, and if you use 365 you get 10.52% (both rounded to 0.01%).

How is the interest of a savings account calculated?

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It%26#039;s usually deposited monthly. The interest in the example you describe would be approximately $0.41 monthly.|||usually payed monthly, the more you have the more interest you will get so your account will keep growing if you don%26#039;t spend too much and make sure you put some in every now and then.|||The bank will calculate and deposit your interest once a month. The bank will determine your average balance for the month, and then multiply it by .5%, and then divide by 12 (for 12 months; you make .5% a year total). I assume that this is an interest-bearing checking account. A saving account should pay considerably more, at least 1 or 2%.

Consider that a paypal account pays over 5%, with no fees.|||The other folks have answered how the interest is calculated. I would offer another bit of advice. You should research and open a high-yield savings account. These accounts pay anywhere from 4-5% interest on deposited money. A couple of examples are HSBCDirect, INGDirect, EmigrantDirect.

With these internet banks, you open a savings account that%26#039;s linked to your existing checking account (you can stick with your regular bank for checking so you don%26#039;t have to change checks, debit cards, etc). You can transfer funds back and forth between you%26#039;re regular bank and your high-yield savings account.

Your $1000 would get you approximately $4.17 per month compared to the $.41 another poster wrote....much better return on your money.|||None of the calculations above are exactly right.

It is true that banks often deposit the interest monthly -- but it is calculated using daily balances. The formula is a little odd -- sometimes referred to as Actual/360 accrual. The money is compounded using actual days -- but the interest rate used is the yearly rate divided by 360 -- not 365.

To find your future value after compounding, use the following formula:

F = A * (1+R/360)^N

F = future value

A = amount invested

R = yearly rate

N = actual number of days invested.