How to work out interest on your savings

Learning how to work out interest on your savings can help you keep your cash in the best-performing accounts on the market.

And the good news is, it’s not rocket science. There are a few simple formulas and basic concepts to get your head around when calculating interest. Once you understand them, you’ll have a better grasp of different savings products and their benefits.

If you want a quick lesson on how to calculate interest (and some tips on maximising your savings), you’re in the right place. By the end of this article, you’ll see how much you could earn from your savings.

If you need a quick estimate of the interest you’ll receive on a single deposit, try our instant calculator tool. The Insignis calculator can also be adjusted based on whether you invest in a personal, business, or charity account.

In this article, we’ll cover:

• Key concepts (principal amount, interest rate and time period)
• Types of interest: Simple vs Compound
• How to calculate Simple Interest
• How to calculate Compound Interest
• How to maximise your interest

Key concepts

The formulas used to calculate interest rely on a few key terms. These are known as the principal amount, interest rate and time period.

• The principal amount is the original amount of money deposited into your savings account. 
• The interest rate is the percentage of your savings that you’ll be paid by your bank each year.
• The time period is how long you keep your money in the savings account.

Types of interest: Simple vs Compound

There are two main types of interest: Simple and Compound. Each type affects how much you earn on your savings differently. Simple interest is sometimes used with personal loans or similar products, but compound interest is the most common form of interest on savings accounts, mortgages, and credit cards.

How to calculate Simple Interest

Simple Interest is a type of interest that’s based solely on the principal amount deposited into the savings account. It’s calculated using the following formula:

Interest earned = Principal amount x interest rate (as a decimal) x time period

For example, if you deposit £100,000 into a savings account with an interest rate of 3.5%, you’ll earn £3,500 after one year.

The calculation: 100,000 X 0.035 X 1 = 3,500

If you save your deposit for five years, you’ll earn £17,500 (100,000 X 0.035 X 5 = 17,500).

How to calculate Compound Interest

Compound Interest works differently and uses a different calculation. As well as earning interest on the principal amount you’ve saved, you’ll also earn interest on the interest itself. The interest can be compounded at different frequencies, such as monthly, bi-monthly, or annually. Overall, compound interest means more significant returns (and a slightly more complicated formula).

If you want to work out the interest you’ll earn with Compound Interest, then you need this equation:

Interest earned = P*(1+r/n)^(nt)

For this, P is the principal balance, r is the interest rate (as a decimal), n is the number of times interest is compounded annually, and t is the time period.

Confused? Don’t worry. Plenty of online calculators can do the work for you (and we’ll suggest some in a moment). However, the best way to understand compound interest and how it compares to simple interest is to look at how it works in practice. So, let’s try another example.

• You deposit £200,000 in an account earned, meaning you’ll now earn interest on the total £210,000 in your savings account. The second interest payment will be the slightly higher amount of £10,500.
• Then, at the end of the third year, you’ll earn interest of £11,025, and so on. By the end of year five, you’ll have £255,256.31 in your account.

You'll earn interest faster when it is compounded at a higher frequency. 

For example, if you deposited the same £200,000 in a savings account with a 5% interest rate and the interest is paid monthly rather than annually, your savings will have grown to £256,671.74 after five years.

Maximising interest on your savings

The best way to maximise interest on your savings is to hunt for the best high-yield or high-interest savings accounts on the market. There are lots of different products on offer – thousands, in fact – each with different interest rates and conditions regarding how you keep your money. Some savings accounts, for example, offer bonus rates for regular savers, while others reward you for keeping your money locked away for a set amount of time.

Let’s look at four types of savings accounts that can help you maximise your interest — and how you can use them to your advantage.

1. Regular Saver Account

Regular Saver Accounts are designed to reward just that – regular saving. You’ll need to deposit a minimum amount into the account each month, usually for a set amount of time. Regular Saver Accounts can offer great interest rates – sometimes as high as 8% – but may not allow you to deposit a large lump sum. With that in mind, they are great for people who want to get in the habit of putting some money aside for the future.

If you want to maximise the benefit of this type of account, there are a few things to keep in mind. To secure the top rate – or to be awarded a bonus rate – payments must be made on time, or you may lose the rate.

The interest rates on Regular Saver Accounts usually have a limited timeframe, too, and after a year, the rate may drop back to something closer to your standard savings account. This is when you may want to move your money into a better product, so once you’ve got the rewards, be prepared to make a timely switch.

2. Fixed Rate Savings Account (also known as Fixed Rate Bond)

With a Fixed Rate Savings Account, you’ll need to commit to leaving your money in the account for a set amount of time – usually between 9 months and 5 years. The interest rate will be fixed, meaning you’ll know exactly how much interest you’ll earn over time.

When interest rates are high – for example, when pushing 5% – it may be a good moment to consider locking in a fixed rate for the long term. That’s because even if/when interest rates start to fall, you’ll still be earning at the rate you signed up for. While Fixed Rate Bonds are well suited to those with a large lump sum to deposit, there can be penalties if you need to withdraw your money early.

Be cautious of locking away money you may require in the short-to-medium term.

3. Notice Savings Account

Another type of savings account that can deliver high interest rates is a Notice Savings Account. These don’t have a fixed term but instead require a notice period before you can withdraw money. The notice period could range from 30-120 days. Right now, interest rates on notice savers can be just over 5%.

As with a Fixed Rate Account, a Notice Savings Account is most beneficial to those with large sums of money they are comfortable locking away. However, the interest rate will be variable in this case, so it will fluctuate according to the Bank of England Rates.

Notice Savings Accounts can be a helpful approach to saving for a house deposit as you can benefit from a competitive rate without the temptation to dip into your pot for short-term spending. As you might expect, the more restrictive the account – and the longer the notice period – the higher the interest rate.

4. ISAs

Individual Saving Accounts (ISAs) are not usually considered “high-interest” but instead offer the benefit of allowing you to save and sometimes invest money tax-free. Currently, you can save up to £20,000 in this manner each year, taking advantage of several different types of ISA, which work as follows: 

• Cash ISA: These are easy-access accounts, which usually provide a variable interest rate. Sometimes, you can secure a fixed rate if you lock your money away for a set period of time.
• Stocks & Shares ISA: This ISA allows you to grow your money across a range of shares and investments. These tend to be higher risk, because the value of what has been invested can fluctuate.
  
• Innovative Finance ISA: For a higher-risk investment, this ISA allows you to put your money into peer-to-peer lending and crowdfunding projects.
• Lifetime ISA (LISA): The annual limit for this type of ISA, which is designed to be used to purchase a first home or later in life as part of your retirement savings, is £4,000 (note: this counts towards your £20,000 limit, meaning you’d have £16,000 remaining to place in other ISAs in the same tax year). A LISA can only be opened by those aged between 18-39 and paid into until you reach 50. The government will pay a bonus of 25% each year, up to a maximum of £1,000.
  
  There are limits on when funds can be withdrawn without incurring a penalty. Once you turn 50 years old, you cannot pay into the account or earn the 25% bonus. Your cash can only be withdrawn from a LISA if you’re (a) over 60; (b) terminally ill or (c) you want to buy your first house (which must be worth £450,000 or less). Any other reason incurs a 25% charge as a penalty.

Usually, ISAs offer lower interest rates and are not as lucrative as savings accounts. However, while ISAs are available to everyone regardless of their wealth, if you have a large amount of money and you’re in the higher income tax bracket it can be one efficient way to spread your savings. If you’re paying tax on the interest from your savings, it can make sense to place additional funds in ISAs — especially if you’re able to leave the money there for the long term. 

Overall, ISAs can be a fruitful addition to a well-managed savings portfolio. 

Note: We don’t typically offer ISAs via the Insignis Platform. However, it’s always helpful to understand all your options for your savings. This is why we’ve outlined the different types of ISAs here.

How Insignis can help

Working out the interest on your savings can be complicated and time-consuming. Maximising your savings can be even harder. That’s because thousands of different savings products are on the market, all offering different rates, deals and bonuses. And the best way to manage your money – and maximise your interest – is to be nimble.

Smart saving requires you to diversify your funds across various accounts. You might have regular deposits from a standard savings account going into a Regular Saver Account to benefit from a bonus deal. But when the year ends, you switch your pot into a Fixed Rate Account to capitalise on high interest rates. Meanwhile, another deposit can be locked away in a Notice Savings Account, ready to be put towards a new property purchase in a year’s time.

It can be hard work, making your money work for you, but Insignis makes it easy.

Our platform gives you exclusive access to thousands of top-rate savings products and the latest deals. From one hub, you can spread your savings across multiple accounts, switch according to your needs and withdraw money at any time (depending on your liquidity selection). Best of all, you can keep track of the interest you earn without the extra admin. We do the heavy lifting, and you can watch your savings grow.

Interested? Ask your Financial Adviser about Insignis today.

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