= $1,200 in simple interest over three years What Is Compound Interest?Ĭompound interest is paid on the full balance of your account, including any previous interest you earned.
So, let's say you want to find out how much interest you'd earn (in total) over three years using our example above. R = annual interest rate (expressed as a decimal) P = principal amount (initial investment) If you want to figure out how much you would earn in simple interest on a particular sum of money over a given number of years, you can use the following formula: That's because simple interest does not apply to the interest payments you've already received.Įxample of simple interest (4% per year) on $10,000 savings account deposit
So, for example, if you put $10,000 into a savings account that pays simple interest of 4% per year, after one year you'd earn $400 ($10,000 x 0.04), for a total of $10,400.Īssuming you don't withdraw or deposit funds from the account, and the interest rate stays the same, at the end of the second year you would again earn interest on $10,000 ($400), rather than on your full balance of $10,400.
Simple interest is paid only on the money you deposit. That's why it pays to understand the different ways interest can be calculated on savings accounts, as explained in more detail below. Of course, the amount of interest a bank pays you for the privilege of holding your cash can vary wildly, since it depends on the specific account's interest rate, the size and frequency of your deposits and the type of interest used (simple or compound). 1 But the real advantage of a savings account comes from the interest you earn on your money. And that's true: Not only are your deposits (up to $250,000) FDIC-insured, but you're also less likely to spend the funds you set aside in a savings account. You might think of savings accounts as a safe place to keep your cash.
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