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How to Calculate Interest on a Savings Account

Read our comprehensive guide to calculating interest on your savings account and comparing your offers with Savvy.

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, updated on September 11th, 2023       

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The ability to earn interest is a key benefit to any savings account, so when you’ve found a high rate, you’ll want to estimate how much you can earn to reach your savings goal.

Luckily, you don’t have to use messy and complicated mathematical formulas if you don’t want to. Learn how Savvy’s hassle-free savings calculators can estimate your interest earnings and give you the best path toward achieving your goal. Start comparing your options today.

What is interest and how is it calculated?

Interest rewards you for keeping your funds in a savings account. You’re essentially lending your financial institution money every time you deposit money into your savings account. They use this money to provide home and personal loans to customers or finance to businesses. In return, they pay you interest at a percentage determined by your institution. This interest is usually compounded daily, meaning you get a return on the money you’ve deposited plus the interest you’ve already accumulated.

If you’re wondering how to calculate interest on savings accounts, banks use the following process:

  • The interest rate is divided by the compounding frequency. For example, if your interest compounds monthly, the financial institution would divide that rate by 12.
  • The bank adds one to your divided rate and multiplies this by the power of months you’ll be earning interest.
  • The amount is then multiplied by your account balance.

The formula of this would be:

Final balance = principal x (1 + (interest rate ÷ compounding frequency)) time frame

As an example, if you deposited $7,500 in a savings account earning 2.5% p.a. compounded monthly over 10 years, your formula would look like this:

$7,500 x (1+ (0.025 ÷ 12)) 120 = $9,627.69

$9,627.69 – $7,500 = $2,172.69 total interest

If you want to simplify the process and avoid complex formulas, though, you can use Savvy’s compound interest calculator to estimate how much you’d earn on a daily, monthly or annual basis.

What factors can impact the interest I earn?

Savings accounts have many factors that can impact how much interest you earn. You can easily compare these factors with Savvy to help you get the biggest bang for your buck. Variables include:

Interest rate

Comparing top interest rates is the best way to choose a savings account if you can meet all the conditions to achieve it. Having a high interest rate will allow your balance to grow faster, speeding up the achievement of your savings target.

Bonus interest

Many institutions make higher interest rates subject to you meeting some account requirements, such as a mandatory minimum balance or a certain number of deposits or amount deposited each month. This is common across online savings accounts and can extend to not making any withdrawals for the month. If you can’t meet the requirements, your interest will be calculated at your base rate. Comparing with Savvy will ensure you find an account with affordable conditions you can comfortably meet.

Introductory rates

Banks also offer ‘introductory’ rates to new account holders, offering a short period of high interest, typically for around four to six months, before the account reverts to a much-lower base rate. When you’re comparing, ensure you pay close attention to the base rate on these accounts. This will be the percentage your interest is calculated at once your honeymoon period ends.

Deposits

Frequent contributions into your savings account can boost the interest you earn on your nest egg. In most cases, interest is calculated daily, so making weekly or fortnightly deposits will accumulate more interest than if you were making monthly payments. You can use Savvy’s goal calculator to work out how much you need to deposit to reach your savings goal.

Balance

The larger your nest egg, the more interest you’ll earn. If you have a high interest savings account, it can be a good idea to consolidate your accounts into the one savings pool to boost your interest. It’s also worth considering an account which locks your money away if you’re prone to dipping into your savings, which will help protect your balance.

Time period

How much interest you earn depends on how long you save. If you’re in it for the long haul, such as if you’re saving for a home deposit, you’ll end up accruing more interest. For example, if you had an $80,000 savings goal and opened an account with $10,000 at 2.5% p.a., depositing $1,000 monthly, you’d reach your goal in five years and five months. You can use Savvy’s handy savings goal calculator to work out how long you have to save to reach your goal.

Fees

Check what fees savings accounts have when comparing with Savvy. Many are fee-free, but some may have monthly admin fees (up to $5) or paper statement charges (up to $2.50) which seem minuscule, but can add up over time and potentially eat into the interest you earn.

Compare savings accounts

Are you looking to grow your savings?  Compare a wide range of savings accounts with Savvy so you find the best deal in Australia and the highest interest rate to help grow your savings.  

site-logos Rabobank High Interest Savings Account
  Maximum interest rate Base interest rate Introductory offer period Government guarantee  
site-logos 5.75% p.a. 4.40% p.a. 4 months Yes
Go to site

Rabobank’s High Interest Savings Account helps grow your savings while offering flexibility and easy access to your money.

More details
site-logos Up Savers Account
  Maximum interest rate Base interest rate Introductory offer period Government guarantee  
site-logos 4.35% 0.00% N/A Yes
Go to site

Use invite code SAVVY10 for $10 upon successful sign-up. (Refer to offer T&Cs on Up website)

More details

Disclaimer: Savvy is not advising or recommending any particular product to you. We provide general information on products for the purposes of comparison, but your personal situation or goals are not considered here. Although we try to make our comparisons as thorough as possible, we do not have information on all products on the market on our site.

You should always consult a given offer's PDS or further documentation in the process of deciding on which loan to choose, as well as seeking independent, professional advice. If you decide to apply with one of the lenders listed above via our website, you will not be dealing with Savvy; any applications or enquiries will be conducted directly with the lender offering that product.

Frequently asked questions about savings account interest

Is it possible to lose money in a savings account?

Yes – while you won’t physically lose money unless you spend it, you can earn less than the cost of your fees if you don’t shop around. For instance, picking a savings account with a low base rate and high fees could cancel out any interest you earn, making your savings plan counterproductive. Comparing with Savvy is a good way of ensuring you can get the best return on your money.

Do I have to declare any interest I earn on my tax return?

Yes – any interest you earn must be declared in your tax return for the relevant financial year. This includes if your earnings are below the taxable threshold of $18,200.

How are interest rates determined on savings accounts?

The RBA sets the national cash rate monthly. It’s up to the banks and other financial institutions to pass any changes onto their customers. When the cash rate is high, so too are interest rates, with low cash rates having the equivalent effect.

Can I get my interest paid into a linked everyday account?

Yes – this is standard practice for accounts such as term deposits. You can nominate an account for your interest to be paid into depending on when it’s accrued. However, having it paid back into your savings account will allow your interest to compound and your balance to grow faster.

Can I have multiple savings accounts?

Yes – you can have as many savings accounts as you desire if they’re with different banks. Depending on who you bank with and the type of savings account you want to open, you can have up to nine accounts with the same institution. However, you’ll earn more interest if your savings are pooled in one place.

Can I be denied a savings account?

Yes – if you don’t meet the eligibility criteria. Banks require you to be over the age of 14 to open your own savings account and have an Australian residential address for tax purposes.

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