What do my savings really earn?
Overnight savings accounts and fixed-term deposits are the classic safe investments. Banks advertise an annual rate, but money often sits in the account for only a few weeks or months. How much interest is actually credited can be calculated with the simple interest formula. This article shows what to look out for. You can follow every calculation in the interest calculator.
Overnight savings: always available, variable rate
With an overnight savings account you can access your money at any time, but the rate can change at any time too. Interest is calculated to the day and usually credited monthly, quarterly or annually. The formula is:
Interest = balance · rate · days / (100 · days per year)
Example: €15,000 sits in the account for 45 days at 2.0%. Under act/365 that is 15,000 · 2 · 45 / 36,500 = €36.99. If the bank uses act/360, it is 15,000 · 2 · 45 / 36,000 = €37.50. The method your bank uses is stated in its terms and conditions. The differences are explained in day-count methods compared.
Monthly crediting: a little compounding
If interest is credited monthly and stays in the account, it earns interest the following month. Within a year this creates a small compounding effect. Example: €10,000 at 2.4% earns 10,000 · 2.4 / (100 · 12) = €20 per month. With simple interest that would be €240 after one year. With monthly crediting it is 10,000 · (1.002^12 − 1) = €242.66, i.e. €2.66 more.
At typical savings rates the difference is small. Over many years it grows; use the compound interest calculator for that.
Fixed-term deposits: fixed rate, fixed term
With a fixed-term deposit you invest an amount for a fixed period, such as three, six or twelve months. The rate is fixed for the whole term. Interest is usually paid at maturity or annually.
Example: a €20,000 fixed-term deposit at 2.5% for 6 months earns 20,000 · 2.5 · 0.5 / 100 = €250. Important: the stated rate is per year. For half a year you only get half of it, not 2.5% of the amount.
What is the real rate of an offer?
Some offers state an interest amount instead of a rate. It is worth working back to the annual rate: if €5,000 earns €30 in 3 months, that corresponds to r = 30 · 100 / (5,000 · 0.25) = 2.4% p.a. In the interest calculator, choose "rate" as the unknown.
Tax on interest in Germany
Interest counts as capital income. Up to the saver's allowance of €1,000 per year (€2,000 for jointly assessed couples) it is tax-free, provided you have given your bank an exemption order. Above that, 25% flat-rate withholding tax plus 5.5% solidarity surcharge on it apply, 26.375% in total, plus church tax where applicable.
Example: with €1,500 interest per year and the full €1,000 allowance, €500 is taxable. The tax is 500 · 26.375% = €131.88 without church tax.
Interest and inflation
A 2% rate is only a real gain if inflation is lower. If prices rise by 2%, the purchasing power of your money stays roughly the same. The inflation calculator shows how inflation affects your savings.
Conclusion
Interest on savings and fixed-term deposits follows the simple interest formula. Watch three points: the rate is per year, the day-count method determines the interest days, and monthly crediting creates a little compounding. Read more about the formula in simple interest explained.