How this instrument works
A simple-interest savings quote pays a fixed percentage of the original deposit for every year it sits, and nothing more — the rate never touches interest already sitting in the account. Divide the quoted annual rate by 100 to turn a figure like 4 into the fraction 0.04, multiply by the principal for one year's credit, then by the number of years for the full run. There is no reinvestment step anywhere in that arithmetic, which is exactly why the balance rises along a straight line instead of curving the way an account that credits interest onto interest does.
On the numbers this sheet defaults to — $10,000 set aside at a flat 4% for five years — the credit is exactly $400 every twelve months, no more in year five than in year one, for a total of $2,000 and an ending balance of $12,000. The mistake savers make with a quote like this is assuming interest-bearing automatically means compounding, then reading the flat rate against a compounding account's advertised yield as though the two numbers measured the same thing. They do not: a 4% simple return and a 4% return compounded annually start out identical and pull apart every year after, because only the second one is quietly paying interest on interest already earned.
Flat, uncompounded rates like this still turn up on short-dated instruments — three- and six-month promotional certificates, the old-style holiday or Christmas club accounts some credit unions still run, and informal notes where one person holds a fixed sum for another and repays it with a stated flat percentage. The arithmetic here stops at the credit itself: it assumes the rate never resets mid-term, ignores any tax owed once the interest is paid out, and says nothing about withdrawing early, which most flat-rate products either penalize or forbid outright.
- Enter the amount you are setting aside in Principal, $ — the sum before any interest is added.
- Set Annual simple interest rate, % to the flat yearly figure quoted, typed as a whole number: 4 for four percent, not 0.04.
- Put the term in Number of years; the credit scales exactly with this figure because the formula is linear.
- Read Interest earned for the credit alone, and Ending balance for principal plus that credit.
Worked example — $10,000 at a flat 4% for five years
Set Principal, $ to 10,000, Annual simple interest rate, % to 4, and Number of years to 5. Interest earned is I = 10,000 × 4 ⁄ 100 × 5 = 400 × 5 = $2,000 exactly, matching the readout to the cent because nothing in the formula rounds until the very last step.
Ending balance reads $12,000 — the original $10,000 plus that $2,000, and every one of the five years contributed the identical $400 because the amount the rate applies to never changes. Run the same $10,000 at 4% through a compounding sheet instead and five years returns roughly $12,166.53, a gap of $166.53 that exists purely because that version lets each year's credit start earning its own interest the next year.
Questions
Why does my balance grow by the same dollar amount every year?
Because simple interest is calculated only on the original principal, so the credit each year is identical — $400 a year on the default $10,000 at 4%, whether it is year one or year five. A compounding account would credit slightly more each year by also paying interest on the interest already sitting there; this instrument deliberately does not.
Is a flat rate the same thing as the APY a bank advertises?
No. APY already folds in a compounding schedule — daily, monthly or quarterly — so a bank quoting 4% APY pays out more than 4% flat over a year. Compare a simple rate against an APY only after converting one to match the other's compounding basis, or the two figures will look closer than the actual payouts turn out to be.
What kinds of savings products actually pay a flat, uncompounded rate?
Short-dated promotional certificates of three to six months, some credit unions' old-style holiday or Christmas club accounts, and private lending notes where one party holds a stated sum for another at an agreed flat percentage. Ordinary savings and money-market accounts almost always compound instead, so check the product disclosure rather than assuming from the word savings alone.
Does the interest earned figure already have tax taken out?
No — this is the pretax, nominal credit the formula produces. Interest paid on savings-type deposits is generally taxable income in the year it is credited in the US, reported on Form 1099-INT once it passes ten dollars, so the amount you actually keep after tax will run below the Interest earned figure shown here.
What if I withdraw before the term I entered has finished?
This calculator assumes the deposit sits untouched for the full Number of years entered. Real flat-rate products typically forfeit some or all of the stated interest on early withdrawal, or drop to a lower posted early-withdrawal rate instead — the account disclosure states the penalty, since this arithmetic has no way to know it in advance.
References
- CFPB — consumer tools for banking and savings accounts
- FDIC — deposit insurance and consumer banking resources
- IRS Topic no. 403 — interest income and Form 1099-INT
Read this first: This instrument shows arithmetic, not advice. Real offers add fees, taxes and terms that vary by lender and place — verify the figures against your actual paperwork before deciding anything.