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How savings account interest is calculated

People calculating savings interest

Savings accounts are a great way to grow your balance through interest. Not only do they provide a safe place to store your cash (as they are guaranteed under the government’s Financial Claims Scheme), but they also let you move your cash around quickly.

Savings accounts can be one of the easiest ways of achieving your savings goals, whether that be saving for some new tech, going on a trip, or saving up for a home loan deposit.

But how do you know if a savings account is really what you need, as opposed to fixing your rate with a term deposit? The first step in making your choice is to understand how savings account interest works.

What is interest?

Interest is usually a fee for borrowing money. That’s pretty straightforward in the case of your home loan - but when we’re talking about your savings, what does borrowing money have to do with it? 

When you put money away in a savings account, that’s essentially you lending the bank your money. It’s still accessible to you at any time, but while you’re not using it, the bank can. 

In return for that, they pay you interest each month as a little thank you. How much interest you get depends on your balance and the interest rate the bank is offering.

What affects how much interest you earn?

Different elements play a role in determining the amount of interest accrued in your savings account. Some factors include:

Interest rate

  • Interest is calculated as a percentage of your savings, determined by the interest rate your bank is offering. When shopping around for a savings account, you’re looking for the highest interest rate available. But remember to also consider savings accounts with great introductory or bonus rates.

Cash rate

  • The cash rate, set by the RBA, is the interest rate charged on overnight loans between financial institutions. This rate influences the economy by affecting currency exchange rates, inflation, and the overall cost of borrowing (say for a home loan), which is also usually passed on to savings and term deposit rates. Since savings accounts have a variable rate, this change is felt pretty immediately—especially when there are hikes or cuts.

Interest payment schedule

  • Most savings accounts will generate interest on a daily basis, but pay it monthly, which is what you need to know to use our formula below. If you’re looking at a different kind of savings strategy this might be different. For example, a term deposit usually only pays interest once, at the end of the fixed term.

Savings balance

  • The amount of savings you can stash away in your account in the first place will affect how much interest you earn. Look at it this way: 2% of $100 is more than 2% of $10. So if your money is split between a couple of places, pool it all and stick it in a high interest savings account to earn as much interest as possible.

Deposits

  • The best way to plump up your savings? Keep funnelling money into it. Making regular deposits can boost not only your bank balance, but also the amount of interest you’ll earn in a month, because it’s being calculated on a bigger amount. Plus, if you’re after bonus interest rates, many have minimum monthly deposit requirements.

Time period

  • The longer your money is in a savings account, the more interest it will earn. To work out how much interest you’ll earn, you need to know how long you’re going to leave it there. If you’ve got a savings goal - say buying a home in five years - you’ll be able to work out if your current interest rate and deposit schedule will get you the necessary funds in time.

How to calculate interest on a savings account

Not really a maths whizz? No problem. Head over to our savings calculator for a little help crunching the numbers. But if you do want to do it the old fashioned way, here’s the formula for working out interest on savings:

calculating interest rates

So, say you’ve saved $6,500 and parked it in a savings account with an ongoing interest rate of 2.36%. You want to leave it there for 5 years. Your formula would look like this:

And if you want to know how much interest you made in that period, all you have to do is take your old balance away from the new one, to get $813.24 interest.

That wasn’t so hard, but here’s the next step...

Calculate interest with regular deposits

If you’ve been keeping your savings healthy by making regular deposits, the calculations will get a little more complicated. To work out how much interest you’re earning with deposits, the formula looks like this:

Let’s break that down.

First things first, substitute all your values into your formula. Using the example above, it would look something like this:

That’s a lot to work with, so simplify by working out the values inside the brackets.

The next step is to put them to the power of your loan period multiplied by the number of times interest is paid each year (in this case 5 years x 12 monthly payments). This will simplify your equation into something a bit more manageable, like so:

From there, a couple of quick calculations should give you an easy equation and a solution for how much your new savings account balance is.

When we put this one through our handy savings calculator, it gave us an answer of $13,675. Considering we were rounding to the nearest decimal place, that’s pretty close!

To work out how much interest you’ve earned, you’ll need to add your original balance and your deposits, and then minus them from the new balance. The formula for that might look like this:

In our example, the total interest earned was $1,174.92. That means that by making $100 deposits each month, you’ve earned a little over $360 more in interest than you would have otherwise.

Find a savings account

Ready to start earning interest on your rainy day fund? The first thing you’ll need to do is find a competitive savings account. Check out our savings account comparison below to find one that suits you.

Savings Account Comparison Table - last updated 29 May 2024

Search promoted savings accounts below or do a full Mozo database search. Advertiser disclosure
  • Mozo Expert Choice Badge
    High Interest Savings Account

    5.75% p.a. (for $0 to $250,001)

    4.40% p.a.(for $0 to $250,001)

    Yes up to $250,000

    Bonus rate for the first 4 months from account opening

    Reward yourself with a higher rate for your good savings habits with the Rabobank High Interest Savings Account. No Account keeping fees. No minimum balance. Support Aussie farmers with every dollar you save.

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  • Savings Account

    5.35% p.a. (for $0 to $250,000)

    4.75% p.a.(for $0 to $1,000,000)

    Yes up to $250,000

    Bonus variable rate is available for the first four months.

    Competitive introductory variable rate for first 4 months (on deposits up to $250,000). No account keeping fees to pay. Multiple 2023 Mozo Experts Choice Award winner.

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  • High Interest Save Account

    5.10% p.a. (for $0 to $250,000)

    0.10% p.a.(for $0 and over)

    Yes up to $250,000

    Deposit at least $200 to either Spend, Bills or Save account from an external source each month.

    No monthly fees on any of your save accounts. Split your money with up to 10 Save accounts. Set savings targets and track the progress of all your Save accounts. Deposits guaranteed up to $250K per customer.

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  • Mozo Expert Choice Badge
    AMP Saver Account

    5.40% p.a. (for $0 to $250,000)

    1.20% p.a.(for $0 to $5,000,000)

    Yes up to $250,000

    Enjoy a bonus rate when you deposit at least $1000 per month with the AMP Saver Account.

    No account fees. Unlimited transactions when linked to an AMP Bank transaction account. Easy online access to your money. Option to link your savings account to an everyday transaction account. 2024 Mozo Experts Choice Award winner.

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  • Reward Saver Account

    5.25% p.a. (for $0 to $1,000,000)

    0% p.a.(for $0 and over)

    Yes up to $250,000

    Intro bonus rate of 5.25% for balances up to $1,000,000 for the first 4 months, reverting to 3.25%. Minimum deposit of $50 and no withdrawals.

    Introductory bonus rate for balances up to $1,000,000 for the first 4 months. Minimum deposit of $50 and no withdrawals. Start your account online in under 10 minutes and earn interest on balances up to $1,000,000 (T&Cs apply). No monthly account fees, helping you save smarter and faster.

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Jack Dona
Jack Dona
RG146
Money writer

Jack is degree-qualified in communications and creative writing, with a talent for simplifying financial jargon. His approach helps consumers make better decisions. Jack is RG146 certified in generic knowledge and uses flair to make finance interesting.

Cameron Thomson
Cameron Thomson
RG146
Money writer

Cameron, with a background in radio and degrees in creative writing and history, is RG146 certified in Generic Knowledge. He tracks savings rates and trading platforms, aiding Aussie consumers in smart investments.

^See information about the Mozo Experts Choice Savings Account Awards

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