When you put your money in a bank account -- such as a savings account, certificate of deposit or money market deposit account -- or when you make a loan, you're generally rewarded with interest payments. The simple interest formula measures how much interest a certain amount of money earns for a specified period when the interested is all added at the end. If interest is compounded more often, such as monthly or daily, you have to use a more complex formula, known as compound interest.
Simple Interest
Step 1
Divide the annual interest rate by 100 to convert from a percentage to a decimal. For example, if your savings account has an annual interest rate of 1.46 percent, divide 1.46 by 100 to get 0.0146.
Step 2
Multiply the interest rate as a decimal by the number of years that interest accrues. For example, if you leave the money in for two years, multiply 0.0146 by 2 to get 0.0292.
Step 3
Multiply the result by the amount in the account to calculate the simple interest. Finishing the example, if you invested $10,000, multiply $10,000 by 0.0292 to find that $292 in interest accrues over two years.
Compound Interest
Step 1
Divide the interest rate by 100 to convert from a percentage to a decimal. For example, if your savings account has an annual interest rate of 1.46 percent, divide 1.46 by 100 to get 0.0146.
Step 2
Divide the interest rate as a decimal by the number of times each year interest compounds to find the periodic rate. For example, if your savings account compounds interest daily, divide 0.0146 by 365 to get 0.00004.
Step 3
Add 1 to the periodic rate. In this example, add 1 to 0.00004 to get 1.00004.
Step 4
Raise the result to the number of periods that interest accrues. For example, if interest accrues daily for two years, that's 730 periods. So, raise 1.00004 to the 730th power to get 1.029629899.
Step 5
Subtract 1 from the result to find the effective rate over the entire period. In this example, subtract 1 from 1.029629899 to get 0.029629899.
Step 6
Multiply the effective rate over the entire period by the amount invested to calculate the interest income. In this example, multiply 0.029629899 by $10,000 to find that when interest compounds daily, you earn $292.63 in interest.