Interest Earned Calculator: How Much Will Your Savings Grow?

How to Calculate Interest Earned

The total interest earned on any compound interest investment is simply the difference between your final balance and your original deposit. The formula builds on the standard compound interest formula:

Or equivalently:

Where P is the principal, r is the annual interest rate (decimal), n is the compounding frequency per year, and t is the time in years. The factored form is useful because the expression in brackets — (1 + r/n)^nt − 1 — represents the pure percentage growth of your money, independent of the deposit size.

Step-by-Step Example: $25,000 at 4.50% APY for 5 Years

Suppose you deposit $25,000 into a high-yield savings account offering 4.50% APY compounded daily.

Your $25,000 deposit earns $6,308.12 in interest over 5 years, bringing your total balance to $31,308.12. That is more than 25% growth on your original deposit — without contributing another cent. According to data from the FDIC, rates on high-yield savings accounts have been significantly above the national average for traditional savings, making it well worth comparing options.

Simple vs. Compound Interest Earned: Understanding the Difference

Before diving into account comparisons, it is essential to understand the fundamental difference between simple and compound interest — because the method of calculation dramatically affects how much money you actually earn over time.

Simple interest is calculated only on your original principal. If you deposit $10,000 at 5% simple interest, you earn exactly $500 every year, regardless of how many years pass or how much interest has accumulated. The formula is straightforward: Interest = P × r × t. After 10 years, you would have earned $5,000 in interest ($500 × 10 years).

Compound interest, on the other hand, is calculated on your principal plus all previously earned interest. This means your interest earns its own interest, creating an accelerating growth curve. In year one, you earn interest on $10,000. In year two, you earn interest on $10,500. In year three, you earn interest on $11,025. Each year, your effective earning base grows larger.

This difference might seem minor in the short term, but over longer periods, the gap becomes substantial. According to the SEC's guide to savings and investing, compound interest is one of the most powerful tools available to individual investors — often called the "eighth wonder of the world" in financial circles.

The mathematical relationship between simple and compound interest can be expressed as:

The key insight is that simple interest grows linearly while compound interest grows exponentially. On short time horizons with low rates, the difference is minimal. On long time horizons with higher rates, compound interest can more than double your total earnings compared to simple interest. Most savings accounts, CDs, and investment accounts use compound interest, which is why understanding how to calculate it is crucial for accurate financial planning. For more details on the mathematics, see our compound interest formula guide.

Interest Earned Examples at Various Rates

One of the most common questions savers ask is: "How much interest will I actually earn?" The answer depends heavily on your interest rate. The following table shows exactly how much interest a $10,000 deposit earns at different APY rates over 1, 5, 10, and 20 years (assuming daily compounding):

Several powerful insights emerge from this table:

• The rate difference is dramatic. At 0.50% APY, $10,000 earns just $512 over 10 years. At 5.00% APY, the same deposit earns $6,487 — more than 12 times as much interest.
• Time amplifies rate differences. The gap between 0.50% and 5.00% is $463 in year one, but $16,109 over 20 years. Higher rates combined with longer timeframes create exponential divergence.
• Even small rate differences compound. The difference between 4.50% and 5.00% APY seems small (just 0.50%), but on $10,000 over 20 years, it amounts to $2,683 in additional interest. For larger balances, this scales proportionally.

Use our compound interest calculator to run these calculations with your specific principal and target rate.

Interest Earned on Different Account Types

Not all savings vehicles are created equal. The interest rate (APY), compounding frequency, and any restrictions on the account all affect how much interest you ultimately earn. Understanding which account types offer the best interest earnings potential can make a significant difference in your overall financial growth.

Savings Accounts

Traditional savings accounts at brick-and-mortar banks typically offer the lowest interest rates — often between 0.01% and 0.50% APY. On a $10,000 deposit, that translates to just $1 to $50 per year in interest. High-yield savings accounts, primarily offered by online banks, currently offer rates between 4.00% and 5.00% APY, earning 8 to 100 times more interest on the same deposit. According to FDIC national rate data, the gap between traditional and high-yield savings has widened significantly since the Federal Reserve began raising rates in 2022.

Certificates of Deposit (CDs)

CDs lock your money for a fixed term in exchange for a guaranteed interest rate. Short-term CDs (3-12 months) typically offer rates similar to high-yield savings accounts, while longer-term CDs (3-5 years) may offer slightly higher or lower rates depending on market conditions and the yield curve. The advantage of a CD is rate certainty — once you lock in, your rate cannot decrease even if market rates fall. The disadvantage is the early withdrawal penalty if you need your funds before maturity.

Money Market Accounts

Money market accounts blend features of savings and checking accounts, typically offering competitive interest rates plus limited check-writing privileges. Rates often fall between traditional and high-yield savings accounts, currently ranging from 3.50% to 4.75% APY at most institutions. They may have higher minimum balance requirements than standard savings accounts.

Treasury Securities

Treasury bills, notes, bonds, and I bonds are backed by the full faith and credit of the U.S. government, making them among the safest investments available. I bonds offer inflation-protected returns with rates that adjust every six months based on CPI data. Treasury bills (T-bills) are short-term securities that can currently yield 4.00% to 5.25% depending on term length. All Treasury interest is exempt from state and local taxes, which can boost your effective after-tax return.

The following table compares typical interest earnings across common account types for a $10,000 deposit held for various periods:

The most striking takeaway from this table is the enormous gap between traditional savings accounts and high-yield alternatives. A traditional savings account at 0.50% earns just $512 on $10,000 over 10 years. A high-yield savings account at 4.50% earns $5,530 on the same $10,000 over the same period — more than 10 times as much. This difference is pure opportunity cost: money left in a low-rate account is money you are choosing not to earn.

As Investopedia explains, the APY (Annual Percentage Yield) is the standardized metric that accounts for compounding frequency, making it the correct number to use when comparing accounts. Always compare APY to APY, not APR to APY, to ensure a fair comparison. For a deeper understanding of this distinction, see our APY vs. APR explained guide.

Compound vs. Simple Interest Earnings

Understanding the difference between compound and simple interest earnings is critical because it shows you exactly how much money the "interest on interest" effect is worth in dollar terms. The table below compares total interest earned on $25,000 at 5% under both methods across multiple time horizons:

Several powerful insights emerge from this comparison:

• Year 1 shows no difference because interest has not yet had a chance to compound on itself.
• By year 10, compounding has added $3,222 — more than 25% above what simple interest would have earned.
• By year 20, the compounding bonus ($16,332) exceeds the simple interest earned ($25,000) over 13 years. In other words, interest-on-interest alone has generated more than 13 years' worth of flat interest.
• By year 30, the compounding bonus ($46,087) is larger than the simple interest earned ($37,500). Compounding has contributed more interest than the simple interest itself. Your money is earning more from interest-on-interest than from the original principal's earnings.

These numbers make the case for compound interest as clearly as possible. For more worked examples at various rates and principals, see our compound interest examples page.

Tax Implications of Interest Earned

While calculating your gross interest earned is straightforward, understanding how taxes affect your net earnings is equally important for accurate financial planning. Interest income is generally taxable, and failing to account for taxes can lead to overestimating your actual returns.

How Interest Income Is Taxed

According to the IRS, interest earned from savings accounts, CDs, money market accounts, and most bonds is classified as ordinary income. This means it is taxed at your marginal income tax rate — the same rate applied to wages and salary. If you earn $500 in interest and fall in the 22% federal tax bracket, you will owe $110 in federal taxes on that interest, leaving you with $390 after tax.

Financial institutions are required to report interest payments of $10 or more to the IRS via Form 1099-INT, which you will receive by January 31 of the following year. Even if you do not receive a 1099-INT (because you earned less than $10), you are still legally obligated to report all interest income on your tax return.

Tax on Interest Earned at Different Tax Brackets

The following table illustrates how federal taxes reduce your effective interest earnings at various tax brackets, using $5,000 in gross interest as an example:

Note: Tax brackets shown are for single filers in 2024. State and local taxes may further reduce your after-tax return.

Tax-Advantaged Alternatives

If you are in a higher tax bracket, consider these strategies to minimize the tax impact on your interest earnings:

• Tax-advantaged retirement accounts: Interest earned within a Roth IRA, traditional IRA, or 401(k) grows either tax-free (Roth) or tax-deferred (traditional). A 5% APY in a Roth IRA is truly 5% because you never pay taxes on the growth.
• Municipal bonds: Interest from most municipal bonds is exempt from federal income tax and may also be exempt from state/local taxes if you live in the issuing state. For high-income earners, the tax-equivalent yield of a 3.5% municipal bond can exceed a 5% taxable account.
• Treasury securities: While Treasury interest is subject to federal tax, it is exempt from state and local income taxes. For residents of high-tax states like California or New York, this can meaningfully boost your effective return.
• I bonds: In addition to state tax exemption, I bond interest can be completely tax-free if used for qualified education expenses, making them particularly attractive for college savings.

For specific tax advice related to your situation, consult a qualified tax professional or review IRS publications on investment income and expenses.

How Compounding Frequency Affects Interest Earned

The same nominal interest rate produces different dollar amounts of interest depending on how often compounding occurs. More frequent compounding means interest is added to your balance sooner, so it begins earning its own interest earlier within each year.

The table below shows exactly how compounding frequency changes total interest earned on a $50,000 deposit at 5% APR over various time horizons:

Key observations:

• The annual-to-daily gap grows over time. At 5 years, switching from annual to daily compounding earns you an extra $355. At 20 years, that gap grows to $3,093. On larger balances, these differences scale proportionally — on $500,000, the 20-year gap would be $30,926.
• Monthly captures most of the benefit. The jump from annual to monthly accounts for the vast majority of the extra interest. Moving from monthly to daily adds relatively little — just $36 over 5 years and $285 over 20 years on $50,000.
• The rate matters more than the frequency. The difference between annual and daily compounding at 5% is far smaller than the difference between a 4% account and a 5% account at the same frequency. Always prioritize the highest APY available to you.

Data from the Federal Reserve Economic Data (FRED) portal shows that interest rates on savings products fluctuate over time, so it is worth periodically checking whether your current account still offers competitive rates. Even a 0.50% difference in APY on $50,000 amounts to $250 per year in additional interest.

Maximizing Your Interest Earnings

Understanding the math behind interest earned is only half the equation. Here are five practical strategies to maximize every dollar your savings generate:

1. Choose the Highest APY Available

This is the single most impactful decision. The difference between a traditional savings account at 0.50% APY and a high-yield savings account at 4.50% APY is enormous — on $25,000, that is $1,125 versus $125 per year. Online banks and credit unions consistently offer the highest rates because they have lower overhead costs. The SEC's guide to savings and investing recommends comparing rates regularly to ensure your money is working as hard as possible. When comparing accounts, always verify that the institution is FDIC-insured (for banks) or NCUA-insured (for credit unions) to protect your deposits up to $250,000.

2. Maximize Your Time Horizon

Time is the most powerful variable in compound interest. The longer your money stays invested, the more dramatically compounding accelerates. A $10,000 deposit at 5% earns $6,289 in the first 10 years but an additional $10,247 in the next 10 years — without a single additional contribution. This principle underpins the common advice to start saving for retirement in your 20s rather than your 30s or 40s. Ten extra years of compounding can be worth more than doubling your monthly contributions later.

3. Make Regular Contributions

A lump sum deposit is good. A lump sum plus regular monthly contributions is dramatically better. Consider $10,000 at 5% APY compounded monthly for 10 years:

• Lump sum only: Final balance = $16,470.09 (interest earned: $6,470.09)
• Lump sum + $100/month: Final balance = $32,028.67 (interest earned: $10,028.67)
• Lump sum + $200/month: Final balance = $47,587.25 (interest earned: $13,587.25)
• Lump sum + $500/month: Final balance = $94,263.00 (interest earned: $24,263.00)

Adding just $200 per month more than doubles your interest earnings compared to the lump sum alone. Each monthly contribution starts its own compounding clock, and earlier contributions have more time to compound than later ones.

4. Consider CD Laddering for Locked-In Rates

If you do not need immediate access to all your savings, a CD ladder lets you earn higher rates on portions of your money while maintaining periodic liquidity. By staggering CDs with 1-year, 2-year, 3-year, and 5-year terms, you capture the higher rates available on longer terms while having a CD mature every year. This strategy earns more interest than parking everything in a savings account while avoiding the penalty risk of locking all your funds into a single long-term CD.

5. Reinvest All Interest and Dividends

For compound interest to work at full power, interest must be reinvested rather than withdrawn. Most savings accounts and CDs do this automatically — the interest is credited to your balance. But in investment accounts, you may have the option to receive dividends as cash. Choosing automatic reinvestment ensures every dollar of earnings begins compounding immediately, maximizing your long-term returns. For investment accounts like a Roth IRA, this reinvestment is especially powerful because the growth is tax-free.

6. Monitor Rate Changes and Be Willing to Move

Interest rates are not static. A high-yield savings account offering 5.00% APY today might drop to 4.25% next year if the Federal Reserve lowers rates. Conversely, new competitors may enter the market with promotional rates. Set a calendar reminder to review your savings rates quarterly and be prepared to move your money if a significantly better option becomes available. The friction of opening a new account is minimal compared to the potential cost of leaving your money in an underperforming account for years.

7. Use Tax-Advantaged Accounts When Appropriate

If you are saving for retirement, education, or health expenses, tax-advantaged accounts can significantly boost your effective interest earnings. A 5% return in a Roth IRA is truly 5% because you never pay taxes on the growth. The same 5% in a taxable account might effectively be 3.90% after a 22% federal tax hit. Maximizing contributions to accounts like 401(k)s, IRAs, HSAs, and 529 plans should generally take priority over taxable savings accounts for long-term goals.

Frequently Asked Questions