How Much Interest Will I Earn on Savings? What the Bank’s Rate Actually Pays

The Formula Behind the Number

Savings interest compounds, meaning each period’s interest is calculated on a balance that already includes previous interest. The standard formula is:

A = P(1 + r/n)^nt

Where A is the final amount, P the principal you start with, r the annual interest rate expressed as a decimal (4% becomes 0.04), n the number of compounding periods per year, and t the number of years.

Take £10,000 at 4% compounded monthly for five years. That’s 10,000 × (1 + 0.04/12)^(12×5), which works out to roughly £12,210. Simple interest on the same money would have produced £12,000 flat. The £210 difference is compounding doing its work, and it grows disproportionately over longer periods, which is the whole point. Our comparison of simple versus compound interest covers exactly how that gap widens.

APY vs Interest Rate: Why They Differ

This trips up more people than the formula does. A savings account might advertise a 4.00% interest rate and a 4.07% APY. Both refer to the same account.

The nominal interest rate is the headline figure before compounding is accounted for. APY, or AER in the UK, is the effective annual return once compounding is included. If interest compounds monthly at a 4.00% nominal rate, you earn slightly more than 4% over the year because each month’s interest earns interest for the remaining months. APY expresses that reality as a single number.

Which one should you compare accounts on? APY, always. It’s the only figure that’s genuinely comparable across accounts with different compounding schedules. An account paying 4.05% compounded annually and one paying 4.00% compounded daily look close on the headline rate but the second one wins slightly on APY, and APY is the number that reflects what lands in your account.

What £10,000 Actually Earns

Here’s £10,000 sitting untouched at various rates, compounded monthly, showing what you actually end up with.

Two things stand out. First, the one-year differences are unexciting: the gap between 2% and 6% is about £415 on ten grand. Second, the ten-year differences are not: that same rate gap becomes nearly £6,000. Compounding rewards patience far more than it rewards rate-shopping in any single year, which is a genuinely useful thing to internalise before spending a weekend chasing an extra 0.15%.

On compounding frequency, the effect is real but modest. At 5% on £10,000 over a year, annual compounding pays £500, monthly pays about £511.62, and daily pays about £512.67. The move from annual to monthly is worth having. The move from monthly to daily is worth roughly a pound. Don’t pick an account on that basis.

Why Regular Deposits Beat a Better Rate

Here’s the part that gets underweighted. Start with £10,000 at 4% and add nothing: after ten years you have about £14,908. Start with the same £10,000 at 4% and add £200 a month: you finish with roughly £44,400.

The extra £24,000 in deposits generated about £5,500 in additional interest, but the deposits themselves are what moved the number. In the first ten years of almost any savings plan, contribution rate dominates interest rate. That flips eventually, and for a thirty-year horizon compounding genuinely does the heavy lifting, but people routinely obsess over the rate while the lever that matters more sits untouched.

My honest read: if you’re choosing between spending an hour finding an account paying 0.3% more and setting up a standing order for an extra £50 a month, the standing order wins comfortably over any realistic timeframe.

What Quietly Erodes the Return

The projected balance is a gross figure. Two things reduce it before you get to spend anything.

Tax. Savings interest is generally taxable income, with the specifics varying enormously by country and by account type. Tax-advantaged wrappers such as an ISA in the UK or a Roth IRA in the US change the picture significantly. A 5% return taxed at 20% is a 4% return, which over a decade is not a rounding error.

Inflation. This is the one that does the real damage and shows up on no statement. If your account pays 3% and inflation runs at 4%, your balance grew and your purchasing power shrank. The number went up and you got poorer. Real return, meaning nominal return minus inflation, is the only figure that describes whether your savings are actually gaining ground. For much of the past few decades, ordinary savings accounts have delivered a negative real return, which is an uncomfortable fact worth confronting rather than ignoring.

None of this makes savings accounts pointless. Liquidity and capital safety are worth paying for, and an emergency fund is not an investment. But calling a 3% account “growth” when inflation is running at 4% is a category error.

The Rule of 72

A quick mental shortcut for doubling time: divide 72 by the annual interest rate, and you get roughly the number of years for your money to double.

At 6%, that’s 72 ÷ 6 = 12 years. At 4%, 18 years. At 2%, 36 years. It’s an approximation and it drifts at rates above about 15%, but between 2% and 10% it’s accurate enough to be genuinely useful for sanity-checking any projection someone hands you. If a savings product claims to double your money in five years, the Rule of 72 says that implies roughly a 14% annual return, which should prompt some questions.

Frequently Asked Questions

How much interest will I earn on my savings?

Use A = P(1 + r/n)^(nt). For £10,000 at 4% compounded monthly over five years, that’s roughly £12,210, meaning £2,210 in interest. The exact figure depends on your rate, compounding frequency, term, and any regular deposits.

What’s the difference between interest rate and APY?

The nominal interest rate excludes the effect of compounding; APY (or AER in the UK) includes it. An account with a 4.00% nominal rate compounded monthly has an APY of about 4.07%. Compare accounts on APY, since it’s the only figure that’s comparable across different compounding schedules.

Does daily compounding earn much more than monthly?

Barely. On £10,000 at 5% over a year, monthly compounding pays about £511.62 and daily pays about £512.67, a difference of roughly one pound. The meaningful jump is from annual to monthly, not monthly to daily.

How long will it take my savings to double?

Divide 72 by your annual interest rate for a close approximation. At 6% your money roughly doubles in 12 years; at 3% it takes about 24 years. The rule is reliable for rates between roughly 2% and 10%.

Is savings interest taxable?

In most countries, yes, though rules vary widely and tax-advantaged accounts such as a UK ISA or a US Roth IRA change the treatment substantially. A 5% return taxed at 20% becomes an effective 4%, so tax is worth building into any projection.

Should I focus on finding a higher rate or saving more each month?

Over the first decade, regular deposits typically move the final balance far more than a modestly better rate does. £10,000 at 4% grows to about £14,908 in ten years untouched, but adding £200 a month takes it to roughly £44,400.

The Bottom Line

How much interest you’ll earn on savings comes down to four inputs: starting balance, rate, compounding frequency, and time. Compare accounts on APY rather than the headline rate, don’t lose sleep over daily versus monthly compounding, and check your real return against inflation before calling it growth. Then set up the standing order, because in the years that matter most it does more work than the rate ever will.