How do I calculate How Much Money I Will Earn?

Figuring how much money you will earn on your deposit accounts is easy. Well for me it is. When I worked in banking, though, most people asked me to do it for them. There are some fundamental pieces of info that you need to know. Almost all interest rates are calculated on and annual basis. You can relate it to miles per hour. Just like miles per hour annual percentage rates give you a speed at which your money is growing. Here is a good place to discuss Simple Interest vs Compound Interest. Here is an example of Simple Interest: Deposit $1000.00 for one year at 5%. Multiply .05 times 1000.00. You answer should be $50.00. So without compounding you would get $50.00 for the year. What about compounding that interest? One question you would want to ask is how often does the interest compound? Common compounding periods are monthly, semi-annually and annually. I have seen daily and weekly, but those are unusual. For this example we will use monthly compounding. In your first month you must go through the calclation we used earlier. $1000.00 times 5%, but wait isn't that annual Simple interest calculation. Correct, there are additional steps. We have to break down the amounts into smaller increments. We are compounding monthly, so we will divide the $50 dollars by 12 and get $4.1666666. We will round up to the nearest penny and make it $4.17. Now for the second month we will take that amount and add it to the $1000.00. Now we have $1004.17. We apply the same formula to that amount and do it for each month for 12 periods adding the interest earned to the last months total. There are two measurements that banks use for Annual Percentage Yield (APY) and Annual Percentage Rate (APR). APY represents what you should expect with compounding and APR would represent Simple Interest. Here is something to be aware of. Months have different numbers of days in them. You will notice that each month your interest will most likely be different. That makes an additional step you will have to do to get a more accurate number. What I tell people to do is break your interest down into dollars a day. Once you have done that you can figure any number of days for monthly, bi-monthly, 90 days etc. Let's try it for a 28 day month. $1000 X .05 = $50.00 then divide by 365 = .137 per day (13.7 cents) times 28 days = $3.836 . Now you can see that is lower than the original $4.17. That is because, in the first calculation we assumed every month had the same number of days. If you want to make your life simple you can get a inexpensive financial calculator that will do these calculations for you. Another peice of info that is important is that many banks will keep the interest earned in an account if you close it before the interest is paid. Make sure you understand this policy at your bank. Branch Managers usually have the authority to give you the partial month of interest. These are basic steps that you can use at any bank.