Friday, November 16, 2018
Savings Accounts Guide, Banking & Interest Rate Resource.

Simple Interest Formulas, Savings

When interest is based on the principal amount only, with not any accrued interest added, it is considered simple interest. This amounts to less earnings to the account holder than by compounding methods.

The simple interest earned =
Principal Deposit x R x D

Where R is the rate of simple interest and D is the duration. So $1,500 in an account at a 3% rate will earn $90.00 over the course of a two years. Giving a total of $1,590 in the account :
$1,500 x .03 x 2

Note that the interest in this example is arrived at over the total duration (does not reset after the first year, but rather is always computed on the principal deposit). In reality amount(s) will vary by savings institution based on when the interest is being paid on the account.

When figuring interest by this and other formulas, make sure to clarify that the rate being offered or advertised is in fact a fixed rate. Otherwise, if the account is based on a variable rate, for the purposes of comparing earnings, the outcome will differ and reach an unknown sum.

To find your interest rate being paid:
( [Principal Amount & Interest/Principal Deposit] -1 ) / D

Suppose interest and principal amounts to $3,720 after 5 years, and you deposited $3,100:

([$3,720/$3,100] -1) / 5 = .04, or 4% interest was paid

Setting this side by side with compound interest formulas will quickly reveal how much more will be earned on savings over simple interest. A simple concept, yet so important to increasing earnings potential.

Quickly calculate rates with our simple interest rates calculator.

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