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Step 1
Use the formula: Interest = Principle x Rate x Time. Principle refers to the initial amount of your deposit or investment. Rate is the percentage used to calculate the monetary return on your investment. Time is simply how long you hold the investment before withdrawing it from the bank. For example, if you purchase a Certificate of Deposit (CD) for $5,000 that pays 2 percent annual interest, this investment will earn you $100. This interest is considered income.
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Step 2
Identify principle amount. This is the amount that you will use to open your saving or investment account. Generally, instruments that pay a higher yield require a higher principle. Check with your local financial institution to determine if a minimum deposit amount is required to get started. (e.g. $5,000 x 0.02 x 1) $5,000 represents to principle.
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Step 3
Multiply your principle times the percentage rate. The Federal Reserve sets interest rates that member banks use to determine the amount of interest it will pay investors. This amount is normally expressed as a percentage and is multiplied against the principle. (e.g. $5,000 x 0.02 x 1) In this example, 0.02 is the percentage rate.
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Step 4
Multiply principle times rate times time. This final factor in the equation simply refers to the length of time, also known as term, that an investor agrees to keep their money in the bank. Terms on Certificate of Deposits (CDs) can range from 3 months to 5 years. Saving accounts are less restrictive and will earn interest as long as the money is on deposit. (e.g. $5,000 x 0.02 x 1) The term of the investment in this example is 1 year.
