How is the interest of a savings account calculated?

I am going to open a saving account soon, and I really don't understand the whole interest thing. The bank offers and 0.5% interest rate. It is compounded daily. Let's say I put $1000 in the account tomorrow. When will I actually see the interest in my account, and how much would it be. Any advice is much appreciated. Thanks!
How is the interest of a savings account calculated?
The interest will be computed on a daily basis, and you'll earn interest on the previous day's interest (i.e. "compounded daily"). The bank will credit your account the interest on a monthly basis. The 0.5% interest rate is an annual number, so you will have to calculate the amount for a daily basis. Here's the quick math for your daily interest on $1000:





Day1: 1000 * 0.005 / 365 = 0.0137


Day2: (1000 + Day1) * 0.005 / 365 = 0.0137





In general terms, the formula for calculating interest for "n" days on your $1000 at 0.5% is:





n days of interest = 1000 * (((1 + 0.005 / 365) ^ n) - 1)





*Response to Taranto (below):





Regarding the use of 360 or 365 for computing interest, check with your bank on how they do the math. The "Actual/360" accrual that Taranto mentions is used to compute interest accruals on money market rates. However, the following is an excerpt from JPMorgan Chase's Web site on compounding:





"Banks and financial institutions routinely use compounding to pay you a higher interest rate. For example, a bank may be offering a CD that pays interest at 10%. If the bank does not compound interest, you will receive 10 percent of your investment as interest income at the end of a year. But if the bank compounds interest every three months (quarterly compounding), you will earn an interest rate of 10.38%. If the bank compounds interest monthly, you will earn 10.47%. And if it compounds daily, you will earn 10.52%."


http://partners.leadfusion.com/tools/cha...





In the daily compounding example, if you use 360 you get 10.67%, and if you use 365 you get 10.52% (both rounded to 0.01%).
Reply:The other folks have answered how the interest is calculated. I would offer another bit of advice. You should research and open a high-yield savings account. These accounts pay anywhere from 4-5% interest on deposited money. A couple of examples are HSBCDirect, INGDirect, EmigrantDirect.





With these internet banks, you open a savings account that's linked to your existing checking account (you can stick with your regular bank for checking so you don't have to change checks, debit cards, etc). You can transfer funds back and forth between you're regular bank and your high-yield savings account.





Your $1000 would get you approximately $4.17 per month compared to the $.41 another poster wrote....much better return on your money.
Reply:None of the calculations above are exactly right.





It is true that banks often deposit the interest monthly -- but it is calculated using daily balances. The formula is a little odd -- sometimes referred to as Actual/360 accrual. The money is compounded using actual days -- but the interest rate used is the yearly rate divided by 360 -- not 365.





To find your future value after compounding, use the following formula:








F = A * (1+R/360)^N





F = future value


A = amount invested


R = yearly rate


N = actual number of days invested.
Reply:The bank will calculate and deposit your interest once a month. The bank will determine your average balance for the month, and then multiply it by .5%, and then divide by 12 (for 12 months; you make .5% a year total). I assume that this is an interest-bearing checking account. A saving account should pay considerably more, at least 1 or 2%.





Consider that a paypal account pays over 5%, with no fees.
Reply:It's usually deposited monthly. The interest in the example you describe would be approximately $0.41 monthly.
Reply:usually payed monthly, the more you have the more interest you will get so your account will keep growing if you don't spend too much and make sure you put some in every now and then.