This post will help you on how to calculate interest on savings account, they include the simplest interest and the compound interest.
When it comes to investing funds into a financial institution like bank, what comes up first is the interest.
You may not necessarily wait for the bank to do the calculation for you, you can do that by yourself to ascertain your interest, before going ahead to invest funds into the bank.
Usually, when it comes to calculate interest on savings account or in an investment, the simple interest method is commonly used.
Then if you want to calculate the interest accrued, the compound interest method is used.
On this article i will be using some investment like the fixed deposit and T-bills to calculate interest on savings account.
How to calculate interest on savings account
Like i said i will be using the two money market investment in to calculate interest earned on savings account.
EXAMPLE 1: You invested N1,000,000 into a fixed deposit account, which runs for one year with an interest of 11%. What will be your interest at maturity.
Using the Simple Interest method:
Simple interest represents a fee you pay on a loan or income you earn on deposits.
The term “simple” means you’re working with the simplest way of calculating interest.
Once you understand how to calculate simple interest, you can move on to other calculations, such as the compound interest.
The formula which is p x r x t = I to calculate interest on savings account
The Calculation: 1,000,000 × 11 ÷ 100 = 110,000
In order to get the monthly interest, we will divide the 110,000 by 12 months which is one year.
110,000 ÷ 12 = 9167 (approximation)
The investment runs for twelve months, and so we will have to multiply 9167 by 12.
9167 × 12 = 110,004
Every fixed deposit has a an added tax of 10%. So we will further divide 110,004 by 10%.
110,004 × 10 ÷ 100 = 11000.4
With that, we have gotten the monthly interest which is 11000.4 respectively.
The above calculation is made based on the simple interest method.
In the case that you want to leave the interest after maturity on your investment account, this is where the compound interest will take effect.
A compound interest is an interest earned on previous interest in an investment. Or it is an interest on an investment’s interest, plus previous interest.
It only comes up if you leave the interest accrued on maturity, and continues to do that depending on the number of months you’re investing.
For example, if you earn a 5% annual interest on mutual funds, a deposit of one million naira would gain you fifty thousand naira after a year.
Then the question is what happens the following year? This is actually where the compounding now comes in.
You’ll earn interest on your initial deposit, and you’ll earn interest on the interest you just earned.
Calculating the compound interest: Take for instance the sum total of 11000.4 for one year (12 months) is 132005 plus your principal which is 1,000,000 which totals 1,132,005 in your investment savings account.
Your bank offers you an annual 10% compound interest rate on your principal (1,000,000) and the interest accrued (132005) for ten years.
To calculate your interest for that ten years, it will be as follows
Compound Interest Method:
Using the formula which is A = P (1 + r / n) ^ nt to calculate interest on savings account
P is 1,132,005
r is 0.1 which is percentage of 10
n is 12 that is one year
t is 10 which is the duration or range which the interest will be compounded
A = 1,132,005 ( 1 + 0.1 / 12) ^ ( 12 × 10)
A = 1,132,005 (1.00833) ^ (120)
A = 1,132,005 (2.70597)
A = 1,132,005 × 2.70597 = 3,063,171.6
To elaborate more on the calculation, i added 1 + 0.1 and divided it by 12, which gives me 1.00833 and If you multiply 12 by 10, it gives you 120.
To get the 2.70597, you will say 1.00833 to the power of (^) 120 which gives you 2.70597.
So after ten years, you will have a compound interest of 3,063,172 if you decided to round it up.
EXAMPLE 2: You want to invest in the treasury bills with N500,000 for one year, with an interest of 15%. Your return investment will be;
Using The Simple Interest Method:
i = Interest
p = Principal
t = Time/Tenor/Duration
r = Rate
500,000 × 1 × 15/100 = 75,000
This simply means that N75,000 is your return investment which will be paid to you, with the actual money that will be deducted from your account is N425,000.
How i got the N425,000 is by deducting 75000 from the 500,000. In order to get the true yield given to you, what we will do is to use this formula; Rate = (Interest × 100)/ (Principal x Time).
Here’s the calculation below;
75000 × 100 ÷ 425000 × 1 = 17.64%
So if you hold for one year ur effective yield is N88200 for investing N500,000 for one year.
Calculating The Compound Interest:
To further calculate interest on savings account;
Let’s say that you didn’t touch the N88200 and also the principal which is N500,000 totaling everything to N588,200.
So you reinvested the N588,200 with an annual compound interest of 7% for twelve years. The calculation will be as follows;
Using the compound interest formula A = P (1 + r / n) ^ nt
p is 588,200
r is 0.07 that is percentage of 7 is 0.07
n is 12, that is one year
t is 12, which is how long the interest will be compounded
A = 588,200 ( 1 + 0.07 / 12) ^ ( 12 × 12)
A = 588,200 (1.00583) ^ (144)
A = 588,200 (2.30962)
A = 588,200 × 2.30962 = 1,358,518.5
To elaborate more on the calculation, i added 1 + 0.07 and divided it by 12, which gives me 1.00417. If you multiply 12 by 12, it gives you 120.
To get the 2.30962, you will say 1.00583 to the power of (^) 144 which gives you 2.30962 respectively.
So after twelve years, you will have a compound interest of N1,358,519 if you decided to round it up.
However, one thing i seemed to notice about our financial institutions in this country is that they don’t offer compounded interest on savings and investment.
You may decide not to touch your interest on your savings investment account, with the principal.
Normally, the bank or financial institution supposed to give you a percentage interest on the previous or initial interest accrued. But many a time they don’t and if you care to request for such, they will offer you 0.50 or 1% maximum.
However, in the case that the bank is lending money to you, that is you’re borrowing from the bank, compound interest rate will be added to it.
For instance you borrow N5,000,000 from the bank to pay up by one year with interest of 5%, after the one year and you didn’t pay up, the interest on the N5,000,000 will begot another interest on top.
But if you’re lending them money, they will tell you that there’s no compound interest on this investment or may offer you a very poor or low rate like 0.25%.
That’s how to calculate interest on savings account or interest earned on savings account.