Banking Category Banking: the easy, simple banking guide

How to calculate daily compounding interest

Calculating interest is a simple way to know how much money you're earning, or how much money you owe.

Finding a bank that offers compounded daily interest is the easiest way to see a larger return on your savings. If you want to compare banks with different interest rates, using this simple calculation can help you shop around and find out how you can make the most money.

Select an initial amount of money to deposit into the bank. This is known as your principal. Use a capital "C" to symbolize this amount in the equation.

Find the rate of interest. Use the lower case "r" to symbolize this amount in the equation. For most banks, 5 to 6 percent interest is pretty good for high-yield savings or Money Market accounts.

Choose the number of times in the year that your interest is compounded. In your case, the number would be 365 because it's compounded daily. A lower case "n" symbolizes this amount in the equation.

Decide how many years you would like to keep your money in the bank. A lower case "t" symbolizes this amount in the equation.

Calculate the daily compounded interest by plugging these numbers into a simple formula: P = C (1 + r/n)^nt. The resulting number (P) is the amount of money you can plan on having by the end of your timeframe.


In the equation P = C (1 + r/n)^nt, the ^ symbol means that the numbers within the parentheses are raised to the power of "nt." Be sure that you know how to write a percentage in decimal form. For example, when you plug 5 percent interest into the equation, it looks like "0.05" not "5." Use this example to guide you if you're unsure about the equation: If you want to invest $10,000 for one year with 6 percent interest, your equation is P = 10,000 (1 + 0.06/365)^(365 X 1). P = $10,618.31. This means that you added $618.31 in that year.