How to Calculate Interest in a Savings Account?
The digital payment system has enabled a modern life where we do not need to carry cash physically all the time. Let’s discuss the start of this transition – the savings account. Not just that, let us also understand how a savings account earns interest and how to calculate it.
What is a Savings Account?
Before you go on looking for an interest rate calculator, you might want to understand the basics of your savings account, and we will tell you how to calculate your savings account interest rate. Firstly, let us start off with a savings account.
A savings account could also be effectively used as a checking account. In this account, you can deposit, withdraw, transfer, overdraw, save money, pay bills and much more. It does not lock your funds. Instead, it acts as your virtual wallet to keep money.
The added benefit is that this virtual wallet will earn you some amount of interest based on the bank you choose to open the account. So, while you spend stored money, you will still be earning some sort of interest over your bank balance.
What is the Savings Account Interest Rate?
The interest on a savings account is similar to the interest you would earn with other investment or savings schemes. Now, you may wonder how you withdraw or transfer your money from the savings account, so how do you get interest, and over what sum – read on to understand.
The interest on your savings account is calculated every day based on the account’s closing balance and credited every three or six months based on the bank’s policy. For Indian bank accounts, the interest rates can range somewhere between 2% to 7%, and slightly a bit higher for senior citizens.
How to Calculate the Interest on a Savings Account?
The formula to calculate the interest of a savings account is Interest=Daily balance\times Interest Rate\times Number of Days/365\times 100\.
Let us use a basic example to demonstrate.
Let us try to understand the formula. The calculations are mainly when it comes to monthly interest amounts.
Let’s say Ashok has a savings bank account, and his bank gives him a 3% interest rate on funds. The following is Ashok’s statement for a month –
As you can see from the table provided above, the closing balance will keep changing as Ashok uses his bank account throughout the entire month.
Banks would typically use the closing balance every day to calculate the total interest amount payable. According to this bank statement here, Ashok’s interest amount will be calculated in the following manner –
| Date | Opening Balance | Deposit | Withdrawal | Closing Balance |
| 02/09/2023 | 1,50,000 | — | 10,000 | 1,40,000 |
| 08/09/2023 | 1,40,000 | — | 5,000 | 1,35,000 |
| 15/09/2023 | 1,35,000 | 30,000 | — | 1,65,000 |
| 01/09/2023 | 1,65,000 | — | — | 1,65,000 |
From Day 02/09 to Day 07/09, the closing balance was Rs. 1,40,000, and using the formula,
Interest = Rs. 1,40,000 x (3 / 100) x (7 / 365) = Rs. 1,40,000 x 0.03 x 0.02 = Rs. 84
From Day 08/09 to Day 14/09, the closing balance was Rs. 1,35,000, and using the formula,
Interest = Rs. 1,35,000 x (3 / 100) x (7 / 365) = Rs. 1,35,000 x 0.03 x 0.02 = Rs. 81
From Day 15/09 to Day 1/09, the closing balance was Rs. 1,65,000, and using the formula,
Interest = Rs. 1,65,000 x (3 / 100) x (7 / 365) = Rs. 1,35,000 x 0.03 x 0.02 = Rs. 99
Thus, the total interest Ashok earns this month is as follows:
= Rs. 84 + Rs. 81 + Rs. 99 = Rs. 264.
Now that you know how to calculate interest, let’s proceed to the next part of this post.
What are the Benefits of Earning Good Interest on Savings Accounts?
The major perks of good interest over your savings account are listed below:
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You Earn Interest on Liquid Funds
Your money in a savings account is extremely liquid. Unlike a fixed deposit account, a recurring deposit account and much more, you do not have a fixed lock-in period where you can’t withdraw your money when in need through the savings account. This means you earn interest on your savings account closing balance, and you also have it in a liquid set-up. It is a win-win situation for all your needs.
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You Will Still Have Easy Access with no Lock-In
Lock-in periods are not applicable with a savings account. This means you can access your funds easily, as mentioned above. You can also use the savings account as an alternative to investments without a lock-in since it earns good returns.
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It Can Also be Useful in an Emergency
If you have sudden emergencies it is your bank balance that comes to your need. It is better than storing money in a home locker, or bank locker. You can keep your emergency fund in a reachable position, and it also multiplies with the interest it earns over time.
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You Have the Benefit of the Debit Card
You can also use the interest earned, and the balance easily through a debit card. A debit card can act as an easy mode of payment, and transactions even when you do not hold physical money in hand.
Conclusions
To sum up, a savings account is your best friend. It can also be an investment that earns you frequent returns. The only smart choice you need to make is to know whether you are choosing the right kind of savings account for all your needs.
