How to Calculate the Annual Interest Rate on a Savings Account

Knowing the annual interest rate on a savings account can help make you additional money. Not all banks pay the same interest rates, even on accounts that otherwise seem the same. By knowing the interest rate on a savings account, you can shop for the best accounts.

Things You'll Need

• Calculator
• Bank statements for the account over the past 12 months

Instructions

1. Understand what the annual interest rate means. The annual interest rate is the simple rate of interest earned, not accounting for the impact of compounding that will have occurred throughout the year (typically on a monthly basis). Because most savings accounts compound interest on a monthly basis, the compounding effect will make the annual interest rate higher than the stated annual rate. By computing the annual interest rate, you can compare accounts that might not compound with the same frequency to one another for purposes of shopping for accounts.

2. Review the bank statements for the account. The first and the last bank statements are most important, but you will need all of them. First, identify the amount in the savings account at the beginning of the 12 month period. Second, review all of the statements to determine if deposits or withdrawals have occurred in the year. If there have been deposits or withdrawals, it is still possible to compute the annual interest rate but the math is more difficult. This process is described in Step 3.

   Identify the total amount of interest paid by the bank over the 12 month period. If there have not been any withdrawals or deposits, then divide the total interest payments by the beginning account balance from the first month's statement.

   For example, if the account began with $2,000 and 12 months later it had $2,209.43, then the annual interest rate is 10.47% ($209.43/$2,000)

3. Compute the annual interest rate without 12 months of data. Computation of the annual interest rate can be done mathematically so long as the nominal annual interest rate and the frequency of compounding are known.

   The annual interest rate will equal ((1+ nominal rate/# of compounds per year)^# of compounds per year)-1.

Tips & Warnings

• Rule of 72. The Rule of 72 is a quick way to roughly estimate how long it will take an account to double in size. To use the method, divide the number 72 by the interest rate of the account. For example, an account with a 10% interest rate will double in about 7.2 years.