So for our kids, who are still quite young, instead of opening an entire other savings account for them, we decided to do “virtual” savings accounts.
Essentially, we have a spreadsheet with what money they have gotten from birthdays and other events, then we just deposit it in our savings. They can withdraw whenever they want.
In this spreadsheet, I’ve been trying to keep track of interest (in a basic way), to show how saving can also help them “earn” money. However, I don’t think I’m doing it correctly.
See Google sheet: dates are not correct and interest rates are not accurate. I just wanted to show that we are attempting to give the “correct” interest rate for the given date. (I know interest rates fluctuate all the time, just trying to not make it not too difficult to maintain)
https://docs.google.com/spreadsheets/d/1rwwIFVOGYt-lIx8Dtuv_6PGz28jSNQbH7LcZG2qKlfg/edit?usp=sharing
Thank you for taking a look, I’ve been trying to get this right for a while.
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I just calculate it at the end of every month by taking the balance and multiplying by the monthly interest rate. So if you offer 6% per year, multiply by 6/12, or 0.5%. So I have a column called “interest” and the next month’s balance is the interest plus the previous month’s interest, and then I drag both columns down as needed.
To make things easier to see, I also have a “deposits” and “withdrawals” column for each month and calculate that in to the current month’s interest (so current month is previous balance - withdrawals + deposits + previous month interest, and interest is current month * monthly interest rate).
This isn’t how banks do it (they do average daily balance), but it’s good enough and encourages my kids to keep month invested through the end of the month.
interest rates are usually an annual rate and accrue monthly. You seem to have applied the interest percentage of 1% to every deposit which is incorrect. Each deposit should gain that amount every year. For example, if you deposited $10 last year now it would be $10.10. If you deposited $10 2 years ago it would now be $10.201 due to the interest compounding.
Interest is usually calculated as a daily accrual of the EOD balance, then applied monthly.
Some systems will actually do the accrual daily and store the balance in a shadow account, others will just calculate the interest when it is applied.
So if you had $100,000 in your account for just one day and nothing else for the rest of the year, at 5% interest you would earn 100000 * 0.05 / 365 = $13.69
This seems like the best answer, it’s still not exact since interest changes daily (at least in the U.S) and interest compounds monthly.
But I changed the interest formula to:
Number of Days * Interest Rate * (Last Balance + Deposit) / 365That seems to be more accurate.
I agree.
Also check out Greenlight which has a built in parents interest feature.
If I were doing this, I would get an average balance for the month (start of month balance + end of month balance divided by 2) and multiply by monthly interest rate (interest rate divided by 12). I would add that interest payment to the end of month balance and that would become the next months starting balance. My spreadsheet columns might look like this:
- Month
- Beginning Balance
- Deposits
- Withdrawals
- Ending Balance
- Interest Earned
Beginning Balance formula would be =sum(Ending Balance, Interest Earned) from the previous line
Deposits and Withdrawals would be numerical entries
Ending Balance formula is =Beginner Balance + Deposits - Withdrawals
Interest formula is =average(Beginning Balance, Ending Balance) * rate / 12
