How To Compute The Interest Earned From Savings Account

Calculator with pen and notebook
Want to know how much can you earn with your savings? So, get ready, and we'll start the easy computation! Source: Public Domain
Having a savings account is a must for individuals who want to secure their future. For them, putting their hard-earned money in the bank is the safest way to do so just to achieve their financial goals. However, young professionals who are just starting their careers are quite interested in building wealth in a more conservative way. It is not surprising to note that they would choose the platform with the least risk available. Thus, they would prefer savings than trust funds and mutual funds. While it is true that UITF and mutual funds provide higher return as compared to savings, they usually come with higher risks. Yes, savings offers the lowest interest rates, but it is still the best way to start with before jumping in to trust funds and stock market. What's important is that there's a venue for money to grow with time. For as long as you already get the basics of savings, then most probably you'll be doing good at investing. There's always a room for learning though, you just have to take one step at a time. But for now, since taking high risk is not the best option, we'll focus on the basic topics of saving, plus a detailed explanation on how to compute the interest that you may earn from a savings account.

So, How to compute the interest?

Since savings can pour some interest. I bet you've been asking how to calculate them, or maybe you're curious about how much would you earn from the money that you put in there. Whichever it is, one thing is for sure: you are concerned with how much gain you can get from the principal amount. Well, that's exactly the same question that I asked before. I've been curious about the formula to compute it not until I asked a bank personnel as to how these things are done. So, to provide information to those who still strive, I am dedicating this post to you.

Be informed that banks have their own policies, rates, and calculations. There might be differences on the terms and conditions that may apply to a certain account. I am only providing this information for you to set your expectations, and to give you an estimate of the earned interest. It is highly recommended that you visit your bank or branch of account and ask the banker for your concerns. 

The formula to be used in getting the interest is this:
I = P*(r/100)*(n/365) 
where: I = interest earned 
P= principal amount 
r = interest rate n = number of days in a certain term (monthly, quarterly, semi-annually, yearly) 

Most banks provide interest in a monthly basis. That is, the interest is credited to your account every end of the month. Other banks credit the interest quarterly, semi-annually or yearly.
To fully understand, let's take a look at the example below. John opened an account on October 1, 2014 and deposited Php10,000 at 5% rate. How much would be the interest at the end of the month if he makes no withdrawal from October 1 to October 31, 2014?

I = P*(r/100)*(n/365)   
= (10,000)*(5/100)*(31/365) 
I = 42.47 
Thus, the interest is Php42.47 and the total money on his account should be Php10042.47 at the end of October.

money in wooden letters
Money is important, so better use it wisely. Source: Philip Taylor, CC BY 2.0, via flickr and ptmoney.com
Here's another case: Suppose that Peter has an initial amount of Php5000 at the start of the month of December. On December 5, he deposited an amount of Php10,000 and another Php10,000 on the 20th. On his birthday, December 28, he made a withdrawal of Php9,000 from his savings account. How much would be the interest if savings is rated at 5% per annum?

The bank policy on Average Daily Balance (ADB) will be followed in this example. ADB should be computed first since the amount involved is not constant. That is, there are some times that Peter withdraws and deposits an amount. To compute ADB, just sum up the amount, and get the average based on the total number of days in a single term.

Example of Peter's statement of account
Date Number of days (n) Available balance in SA (Php)
Dec 1 - 4
4
5,000
Dec 5 - 19
15
15,000
Dec 20 - 27
8
25,000
Dec 28 - 31
4
16,000
Computing the ADB:
ADB = {4(5000) + 15(15000) + 8(25000) + 4(16000)} / 31 days
         =  Php 16,419.35
Using the result for ADB as the principal amount, P:
I = P*(r/100)*(n/365)
  = (16,419.35)*(5/100)*(31/365)
I = Php 69.73

The interest earned at the end of the month is Php 69.73. So, the account bears a total amount of Php 16,069.72.

So here it goes. I hope you find this article helpful and you now know how to do the basic calculations in finding the interest earned from your savings.

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