How do i calculate interest on savings?

Question

Using £10,000 as an example and a AER of 5%

Answer 1

It depends weather you using simple or compound interest. Most likely you should be caluclating on compound interest.
* Compound interest is paid on the original principal and on the accumulated past interest.

Formula:


P is the principal (the initial amount you borrow or deposit)

r is the annual rate of interest (percentage)

n is the number of years the amount is deposited or borrowed for.

A is the amount of money accumulated after n years, including interest.

When the interest is compounded once a year:

A = P(1 + r)n

However, if you borrow for 5 years the formula will look like:

A = P(1 + r)5

This formula applies to both money invested and money borrowed.

Frequent Compounding of Interest:

What if interest is paid more frequently?
Here are a few examples of the formula:

Annually = P × (1 + r) = (annual compounding)

Quarterly = P (1 + r/4)4 = (quarterly compounding)

Monthly = P (1 + r/12)12 = (monthly compounding)