Calculate Interest on a Savings Account per Month
Author: diddlydudette
Posted: Wed Sep 28, 2005 9:08 am
Post subject: Help me calculate.
Say you have 20,000 in a savings acct. with 4% interest. Interest on the account is compounded daily and credited monthly. How exactly is this calculated daily? At the end of one month, what should the total be in the account?
Author: rain
Posted: Wed Sep 28, 2005 2:05 pm
Post subject: Calculate Interest on a Savings Account per Month
Its better to teach you how to calculate this, so I've listed the steps and tried my best to explain. Try it yourself. Your computer will have a calculator, even if you don't have any other calculators handy.
Say you have 20,000 in a savings acct. with 4% interest. Interest on the account is compounded daily and credited monthly. How exactly is this calculated daily? At the end of one month, what should the total be in the account?
a) Interest in saving accounts are usually stated on an annual basis. This means you get 4% if you leave your deposits for 1 year. However, this doesn't mean you won't get the interest payments credited to your account every month, or whenever it reaches a certain figure. Most banks credit your account with the interest payments you've earned monthly.
b) What you want to do is to calculate how much interest you'll earn at the interest rate stated. In this example, lets say this is 4% interest in a year. So you take 4/100 x the amount you have deposited. lets say this is 20000. So 4/100 x 20000. This gives you 800.
This means if you deposit 20000 in the account, you will get 800 interest at the end of the year. This is a very simpilified statement.
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Now that you know how to calculate your annual interest in figures, lets take this one step further. What happens if you want to find out how much interest you have earned in 1 day, not 1 year?
c) From the example above, $800 is for 1 year. There are 365 days in a year, so you take 800/365 = 2.19. You will roughly get 2.19 interest per day.
d) What if its 1 month? There are 12 months in a year. So 800/12=66.67. Each month, you will earn $66.67 more in interest.
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We need to extend this another step now that you have an idea how banks calculate how much interest you've earned in a day, or in a month. When you read the fine print of your account agreement, you will usually see something like "interest rate is listed on an annual basis, accrued daily, and paid monthly".
interest rate is listed on an annual basis
e) This means the 4% interest you see is for a year. If you leave your $20000 money in the bank for 6 months, you will not see $800 in interest. You will see less, about $400.
accrued daily
f) This also means each day, your bank calculates your interest for that day. For example, look at step C again. The first day you put your money in the bank account, you have earned $2.19 interest. Leave it another day, and you have earned another $2.19. Sounds good right?
paid monthly
g) At the end of the month, the bank will pay you the interest you've accumulated in this month. For the first month, lets say there are 31 days. You have earned 4/100 x 20000 x 31/365 = $67.95 in interest. Your bank will add this amount to your current 20000 balance. So you will now have $20067.95.
h) The next day, your bank will start accruing your interest earned again. Remember how to calculate? 4/100 x 1/365 x amount in the bank. This time, amount in the bank is 20067.95. This may seem like a small difference, but this $67.95 extra causes your interest accrued to increase. This is a good thing. When people talk about compound interest, this is basically what they mean. That the amount of interest earned is added to your original balance, and will in turn earn interest for you.
So, for this next month, pretend its another 31 day month.
You will have earned 4/100 x 20067.95 x 31/365 = $68.18 interest. This is slightly more than the 67.95 you have earned the previous month.
-------------------------------------
Try to reread what I've written if you still don't understand. Practise working out the mathematics yourself, if possible. Maths requires practise.
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Author: diddlydudette
Posted: Wed Sep 28, 2005 3:48 pm
Post subject: Calculate Interest on a Savings Account per Month
Rain,
I totally understand how you explained. Thanks so much for taking the time to explain where I'd understand. Do finance institutions usually divide the days by 360 or 365?...or does it just depend on place?
So basically you take 4% of 20,000 and divide by days (365) and that's your daily interest. Then at end of month you will have approx 66.00 and add that to 20,000 and start whole process again for next month
Posted: Wed Sep 28, 2005 9:08 am
Post subject: Help me calculate.
Say you have 20,000 in a savings acct. with 4% interest. Interest on the account is compounded daily and credited monthly. How exactly is this calculated daily? At the end of one month, what should the total be in the account?
Author: rain
Posted: Wed Sep 28, 2005 2:05 pm
Post subject: Calculate Interest on a Savings Account per Month
Its better to teach you how to calculate this, so I've listed the steps and tried my best to explain. Try it yourself. Your computer will have a calculator, even if you don't have any other calculators handy.
Say you have 20,000 in a savings acct. with 4% interest. Interest on the account is compounded daily and credited monthly. How exactly is this calculated daily? At the end of one month, what should the total be in the account?
a) Interest in saving accounts are usually stated on an annual basis. This means you get 4% if you leave your deposits for 1 year. However, this doesn't mean you won't get the interest payments credited to your account every month, or whenever it reaches a certain figure. Most banks credit your account with the interest payments you've earned monthly.
b) What you want to do is to calculate how much interest you'll earn at the interest rate stated. In this example, lets say this is 4% interest in a year. So you take 4/100 x the amount you have deposited. lets say this is 20000. So 4/100 x 20000. This gives you 800.
This means if you deposit 20000 in the account, you will get 800 interest at the end of the year. This is a very simpilified statement.
--------------------------------------
Now that you know how to calculate your annual interest in figures, lets take this one step further. What happens if you want to find out how much interest you have earned in 1 day, not 1 year?
c) From the example above, $800 is for 1 year. There are 365 days in a year, so you take 800/365 = 2.19. You will roughly get 2.19 interest per day.
d) What if its 1 month? There are 12 months in a year. So 800/12=66.67. Each month, you will earn $66.67 more in interest.
-----------------------------------------
We need to extend this another step now that you have an idea how banks calculate how much interest you've earned in a day, or in a month. When you read the fine print of your account agreement, you will usually see something like "interest rate is listed on an annual basis, accrued daily, and paid monthly".
interest rate is listed on an annual basis
e) This means the 4% interest you see is for a year. If you leave your $20000 money in the bank for 6 months, you will not see $800 in interest. You will see less, about $400.
accrued daily
f) This also means each day, your bank calculates your interest for that day. For example, look at step C again. The first day you put your money in the bank account, you have earned $2.19 interest. Leave it another day, and you have earned another $2.19. Sounds good right?
paid monthly
g) At the end of the month, the bank will pay you the interest you've accumulated in this month. For the first month, lets say there are 31 days. You have earned 4/100 x 20000 x 31/365 = $67.95 in interest. Your bank will add this amount to your current 20000 balance. So you will now have $20067.95.
h) The next day, your bank will start accruing your interest earned again. Remember how to calculate? 4/100 x 1/365 x amount in the bank. This time, amount in the bank is 20067.95. This may seem like a small difference, but this $67.95 extra causes your interest accrued to increase. This is a good thing. When people talk about compound interest, this is basically what they mean. That the amount of interest earned is added to your original balance, and will in turn earn interest for you.
So, for this next month, pretend its another 31 day month.
You will have earned 4/100 x 20067.95 x 31/365 = $68.18 interest. This is slightly more than the 67.95 you have earned the previous month.
-------------------------------------
Try to reread what I've written if you still don't understand. Practise working out the mathematics yourself, if possible. Maths requires practise.
Back to top
Author: diddlydudette
Posted: Wed Sep 28, 2005 3:48 pm
Post subject: Calculate Interest on a Savings Account per Month
Rain,
I totally understand how you explained. Thanks so much for taking the time to explain where I'd understand. Do finance institutions usually divide the days by 360 or 365?...or does it just depend on place?
So basically you take 4% of 20,000 and divide by days (365) and that's your daily interest. Then at end of month you will have approx 66.00 and add that to 20,000 and start whole process again for next month
posted by CardRatings.com at 3:30 PM
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