An account like a checking or savings account accrues additional money over time, known as interest. Its purpose is to compensate the account holder for the bank's use of the money in the account. Account holders frequently wish to calculate the interest they stand to lose by withdrawing the money in an account. This calculation depends on the initial balance in the account, the interest rate, the compounding period and the period of time over which the account accrues interest.
Step 1
Obtain the interest rate on the account. Financial institutions typically provide the interest rate on an account as an annual percentage rate, or APR. Let the APR in this example be 6 percent.
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Step 2
Divide the account's APR by 100 to calculate the account's annual interest rate. The APR in this example is 6 percent, so the annual interest rate on the account is 6 / 100 = 0.06.
Step 3
Obtain the compounding period for the interest-bearing account from the financial institution. These institutions typically compound the interest on their accounts each month.
Step 4
Calculate the interest rate on the account for the compounding period by dividing the annual interest rate by the number of compounding periods in a year. The annual interest rate is 0.06 in this example and a year contains 12 compound periods, so the interest rate for the compounding period is 0.06 / 12 = 0.005.
Step 5
Choose the number of compounding periods that the money will be in the interest-bearing account. Let the number of compounding periods be 24 for this example.
Step 6
Obtain the initial balance of the account. Assume the initial balance is $2,500 for this example.
Step 7
Calculate the future value of the account with the formula FV = B * (1 + I)^N, where FV is the future value, B is the starting balance, I is the compounding period's interest rate and N is the number of compounding periods. The future value in this example is FV = B * (1 + I)^N = $2,500 * (1 + 0.005)^24 = $2,817.90.
Step 8
Compute the potential interest on the account by subtracting the initial balance from the future value of the account. The future value of the account is $2,817.90, and the initial balance of the account is $2,500 in this example. The interest you stand to lose by withdrawing money from the account is therefore $2,817.90 - $2500 = $317.90.
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