Running the Numbers: How Much Does Your Savings Account Really Earn?
Most people place money into a savings account with the desire to hold onto it for a substantial period of time — save it for a rainy day, retirement, in case of an emergency, or even for a vacation. The Federal Deposit Insurance Cooperation (FDIC) reports that as of 2013′s year-end, Americans had 8.54 trillion dollars deposited into time and savings accounts, with the average savings account balance among Americans at $3,800 (according to one estimate.)
The FDIC reports the national savings account rate at only .06 percent. A high-yield savings account may earn you around a .7 percent annual percentage yield (APY), or a slightly higher or lower rate, depending on the financial institution and terms of the account. With rates this low, you have to wonder exactly how much, monetarily, your savings account is really worth.
Calculating Your Gain
You can calculate the actual dollar amount your savings account will bring in either by using a formula or by using an online calculator tool. The bank generally states savings account rates in terms of APY. Since APY pre-calculates the compounding portion of the compound interest calculation, and it provides you with a rate representing only one period per year, this makes the calculation simpler. Here is the formula:
A= P[1+ APY] ^ t
The Amount of Money Your End Up With = Principal Amount (1 + Annual Percentage Yield) ^ Number of Years
As an example, let’s say you have the average savings account balance of $3,800 in your high-yield, .75 APY savings account, and you do not intend on adding any additional deposits, nor withdrawing any funds. All other things held equal, your balance would be $3,828.50 after one year ($3,800 x 1.0075) and after two years, your account balance would go up to $3,857.21 [$3,800 x (1.0075 ^2)]. Let’s say you keep the money in your account for 10 years, your balance would rise to $4,094.81 — a difference of $294.81.
If you add or remove funds from your savings account, this impacts your ability to earn interest. For example, let’s assume that same $3,800 starting balance and an APY of .75 percent. However, this time, you are making monthly deposits of $50 ($600 per year.) After one year, your account balance would go up to $4,430.56 — a difference of $30.56 after you account for your deposits. In ten years, your balance would go up to $10,322.72 — a difference of $522.72.
Just as adding funds to your account increases the amount of interest you earn, and conversely, taking money out of your savings decreases your interest earnings. Additionally, many banks will collect from your savings if you overdraft on your checking account. This reduction in your savings account balance, along with bank fees and other reductions, overall reduces the amount of interest you earn.
The Bottom Line
When you compare earnings on a savings account to the rising costs due to inflation, you have to ask yourself if a savings account is truly worth it. Today, $3,800 of 2004 money is worth $4,769.05 – an increase of $969.05. If you opened that .75 APY savings account in 2004 with $3,800 and did not touch it, you would end up with $4,094.81, which is less than the inflated value of your money.
A savings account has several benefits. It provides a safe place for your hard-earned cash, it is FDIC insured, and you can automatically and regularly make deposits into your account. It will also allow you to earn a little interest on your money. However, the key word there is “little.” If you want to earn a significant return on your money, a savings account is probably not the best place to achieve that. However, if you are simply seeking an account where you can hold your savings or emergency fund and then access it when you need it, a savings account is a good option.