The basic formula: multiply your balance by the rate and the time
To find out how much interest you'll earn, you need three numbers: your account balance, the annual percentage yield (APY), and how long the money sits in the account. The simplest version is: balance × APY ÷ 365 × number of days = interest earned.
Most savings accounts compound interest daily, meaning the bank calculates what you owe every single day, then adds it to your balance. That's why the formula divides by 365. If you leave money in for a full year, you can skip the division and just multiply balance by APY. If you leave it in for three months, you multiply by 0.25 instead of 1.
Example: You have $5,000 in a savings account with a 4.5% APY. After one year, you earn $5,000 × 0.045 = $225. After three months, you earn $5,000 × 0.045 × 0.25 = $56.25.
Key Takeaways
- Interest earned equals your balance multiplied by the APY, divided by 365, then multiplied by the number of days your money stays in the account.
- Most banks compound interest daily, so your balance grows a tiny bit each day, and tomorrow's interest is calculated on today's larger balance.
- The APY shown on your bank's website already includes the effect of compounding, so you do not need to calculate it separately.
- Your actual interest may be slightly different from your calculation because the bank may round, and your balance changes when you deposit or withdraw money.
Why daily compounding means your money grows faster than simple math suggests
When a bank compounds interest daily, it does not wait until the end of the year to pay you. Instead, it calculates interest each day on whatever balance you have that morning, adds it to your account, and then tomorrow's calculation includes that new interest.
This creates a snowball effect: you earn interest on your original money, then you earn interest on that interest, and so on. The APY your bank advertises already accounts for this compounding. That is why you can use the APY directly in the formula above without doing extra math.
If a bank used simple interest instead (which almost none do anymore), you would earn the same amount every single day. With compounding, the amount grows slightly each day. Over a year, the difference is small but real—usually a few dollars on a $5,000 balance, but larger on bigger balances or higher rates.
How to adjust the calculation when your balance changes
The formula above assumes your balance stays the same the whole time. In real life, you deposit and withdraw money. When that happens, the interest calculation becomes more complicated because the bank tracks your balance on each day.
Most banks publish a daily balance method: they add up your balance for each day of the month, divide by the number of days, and use that average balance to calculate interest. You can do this yourself by writing down your balance each day, adding all the daily balances together, and dividing by the number of days in the period.
Example: Your balance is $5,000 for 20 days, then you deposit $1,000 and have $6,000 for 10 days. Your average balance is ($5,000 × 20 + $6,000 × 10) ÷ 30 = $5,333.33. Then use that in the formula: $5,333.33 × 0.045 ÷ 365 × 30 = $19.88 in interest for the month.
What your bank's statement actually shows
Your bank statement lists the interest paid each month or quarter, depending on how often they post it. This number is the result of their calculation using their method, which may differ slightly from yours because of rounding or how they handle deposits and withdrawals that happen mid-day.
The statement also shows your APY, which is the rate they used. If the APY changes during the month, the bank prorates it—they calculate interest at the old rate for the days before the change and at the new rate for the days after. You can verify your interest by using the formula above with the average balance method and the APY shown on your statement.
If your calculation is off by a few cents, that is normal and usually due to rounding. If it is off by more than a dollar, contact your bank and ask them to explain the calculation. They are required to show you how they arrived at the number.
The difference between APY and APR in savings accounts
APY (annual percentage yield) is what you use for savings accounts. It includes the effect of compounding, so it is always higher than the base interest rate. APR (annual percentage rate) is used for loans and credit cards and does not include compounding in the same way.
Your bank will always advertise the APY for savings accounts because it is the honest number—it shows what you actually earn. If you see only a base rate like "4.5% compounded daily," you can assume the APY is slightly higher, usually by a few hundredths of a percent. The bank's website or your statement will show the exact APY.
How to compare interest rates between banks
Always compare APY, not the base rate. Two banks might advertise the same base rate but compound differently, which changes what you actually earn. The APY already accounts for compounding, so it is the only number you need to compare.
Use the formula to calculate what you would earn at each bank over the same time period with the same balance. If you have $10,000 and Bank A offers 4.5% APY while Bank B offers 4.75% APY, Bank B will earn you $25 more per year on that balance. Over five years, that is $125 more—not huge, but worth knowing if you are choosing between banks.
Keep in mind that APY changes. Banks raise and lower rates based on what the Federal Reserve does. If you see a high rate, check whether it is a promotional rate that expires after a few months, or whether it is the ongoing rate. Promotional rates are real money, but only if you leave the money in until the promotion ends.
Common mistakes when calculating interest by hand
The most common mistake is forgetting to divide by 365. If you multiply balance by APY and forget the division, you will get the annual interest, not the interest for a shorter period. Always include the ÷ 365 × number of days step.
Another mistake is using the APR instead of the APY. If your account shows both numbers, use the APY. The APR will give you a lower number and is not the right rate for savings accounts.
A third mistake is assuming your balance stays the same when it does not. If you deposit money mid-month, the interest calculation changes. Use the average balance method to account for this, or just trust your bank's statement—they are required to calculate it correctly.
Frequently Asked Questions
Do I need to calculate interest myself or does the bank do it?
The bank calculates it and deposits the interest into your account automatically. You do not need to do anything. Calculating it yourself is useful only if you want to verify the bank's number or predict how much you will earn before opening an account.
What if I withdraw money before the interest is posted?
The interest is calculated based on your balance up to the day it is posted, not the day you withdraw. If you withdraw on the 15th but interest is posted on the 30th, the calculation includes your balance through the 30th. Some banks have rules about minimum balances—if you drop below the minimum, you may lose the interest for that period, so check your account terms.
Does the interest I earn get taxed?
Yes. Interest from savings accounts is taxable income. Your bank will send you a 1099-INT form at tax time if you earned $10 or more in interest during the year. You report this on your tax return. The interest is taxed at your ordinary income tax rate, not a special rate.
Can I calculate interest for a partial year without dividing by 365?
Yes, if you convert the time period to a decimal. Three months is 0.25 years, six months is 0.5 years, and so on. Then multiply: balance × APY × time in years. This gives the same answer as the daily method.
Why does my calculated interest not match the bank's statement exactly?
Rounding and timing differences cause small gaps. Banks round to the nearest cent, and they may calculate interest at specific times of day. Differences of a few cents are normal. If the difference is larger, ask your bank for their calculation details.