How is recurring savings interest calculated?
A recurring (installment) savings plan has you deposit a fixed amount every month, and each contribution only earns interest for the time remaining until maturity β the first month's deposit earns interest for the full term, the last month's deposit earns interest for just one month (simple interest). That works out to: pre-tax interest = monthly deposit Γ n(n+1)/2 Γ (annual rate Γ· 12), where n is the number of months.
Example
Depositing $500 a month at 3.6% annual interest for 12 months means you contribute $6,000 total. Pre-tax interest is $117. At an assumed 22% tax rate, that's about $26 in tax, leaving about $91 after-tax interest, for a maturity value of about $6,091.
How this differs from a lump-sum deposit
Even at the same rate, a recurring savings plan earns noticeably less interest than a lump-sum deposit of the same total amount β because each contribution only earns interest for, on average, about half the term.
Things to keep in mind
This calculator assumes a fixed monthly amount deposited on the same date each month, withsimple interest. Real accounts vary by promotional rates, compounding, and how your bank or brokerage reports interest for tax purposes β the tax rate field lets you plug in your own estimated marginal rate since the US taxes interest as ordinary income rather than at one flat rate.
Frequently Asked Questions
At the same rate, does a lump-sum deposit always earn more than recurring savings?
Yes β comparing the same total principal (deposit amount vs. total contributions) at the same rate, a lump-sum deposit earns more interest, since recurring contributions are split up and each earns interest for a shorter average period.
Can this calculate a flexible-amount savings plan?
This calculator assumes a fixed amount deposited on a set date each month, so it can't accurately model a plan where the amount or timing varies.