What you earn depends on the account type, the bank, and how much you have saved
The amount of interest you earn in a savings account is determined by three things: the annual percentage yield (APY) the bank offers, how much money you keep in the account, and how long it stays there. A bank offering 4.5% APY on $10,000 will pay you roughly $450 per year in interest—but a bank offering 0.01% APY on the same amount pays only $1 per year. The difference between banks can be hundreds of dollars annually, even on modest balances.
Interest accrues daily at most banks but is typically credited monthly or quarterly. That means your balance grows slightly each day, and on the day the bank posts interest, your new balance becomes the starting point for the next cycle. The longer your money sits untouched, the more interest compounds—your interest earns interest on itself.
The APY you see advertised is not may provide to stay the same. Banks change rates frequently, sometimes weekly. When the Federal Reserve raises or lowers its benchmark rate, banks adjust their savings rates within days or weeks. If you lock in a high rate today, it may drop to half that amount in six months.
Key Takeaways
- Interest earned is calculated by multiplying your account balance by the APY and dividing by 365 days, so a $5,000 balance at 4.5% APY earns roughly $225 per year.
- Online banks typically offer higher APY than brick-and-mortar banks because they have lower overhead costs, often 4% to 5% compared to 0.01% to 0.5%.
- Interest rates change frequently and are not locked in, so the rate you see today may be lower next month.
- Money market accounts and certificates of deposit (CDs) may offer higher rates than savings accounts, but they come with withdrawal restrictions or lock-in periods.
How to calculate interest on your own balance
The formula is straightforward: multiply your account balance by the APY, then divide by 365. If you have $10,000 in an account offering 4.5% APY, the calculation is ($10,000 × 0.045) ÷ 365 = $1.23 per day. Over a year, that's roughly $450.
Most banks calculate interest daily but credit it monthly, so your actual daily earnings are smaller than the annual figure suggests. After 30 days, you would see approximately $37 added to your account ($1.23 × 30). The next month's interest is calculated on your new balance, which now includes the previous month's interest—this is compounding.
If your balance changes during the month, the bank recalculates the daily rate. Withdrawing $2,000 mid-month means the bank only pays interest on the lower balance for the remaining days. Depositing money increases your daily earnings immediately.
Why online banks pay more than traditional banks
Online-only banks typically offer 4% to 5.5% APY on savings accounts, while traditional banks with physical branches offer 0.01% to 0.5%. The difference is operational cost. A brick-and-mortar bank pays for building leases, tellers, security, and branch staff. An online bank has none of that overhead, so it can pass higher rates to customers.
The trade-off is access. You cannot walk into an online bank branch or speak to a teller in person. Most online banks offer phone support, email, and chat, but not face-to-face service. For many people, the extra interest—potentially $200 to $400 per year on a $5,000 balance—makes the trade worthwhile.
Some traditional banks have launched online divisions with competitive rates. Credit unions also sometimes offer higher rates than their brick-and-mortar counterparts, though rates vary widely by institution and membership requirements.
Money market accounts and CDs as alternatives
A money market account is a hybrid between a savings account and a checking account. It typically offers a higher APY than a regular savings account—sometimes 4.5% to 5.5%—but may require a higher minimum balance (often $2,500 to $10,000) and limits how many withdrawals you can make per month (usually six). Interest accrues the same way as a savings account, but the restrictions mean your money is less accessible.
A certificate of deposit (CD) locks your money away for a set period—three months, six months, one year, or longer. In exchange, the bank pays a higher rate, often 4.5% to 5.5% for a one-year CD. If you withdraw before the term ends, you pay a penalty that can erase months of interest. CDs make sense only if you know you will not need the money during the lock-in period.
High-yield savings accounts remain the most flexible option for most people. You can deposit and withdraw freely, earn competitive interest, and move your money if a better rate appears elsewhere.
How rate changes affect your earnings
When the Federal Reserve raises its benchmark rate, banks usually increase savings rates within one to two weeks. When the Fed cuts rates, banks drop savings rates even faster—sometimes within days. This means your earnings can fluctuate significantly year to year.
In 2022 and 2023, when the Fed raised rates aggressively, savings account APY climbed from near 0% to 4% to 5.5%. A person with $10,000 in savings went from earning roughly $10 per year to earning $400 to $550 per year. If rates fall back to 1%, that same person would earn only $100 per year on the same balance.
You cannot predict rate movements, but you can monitor your bank's rate against competitors. If your bank drops to 2% while others offer 4.5%, moving your money to a higher-rate bank takes a few days and costs nothing. Many people move their savings account every year or two to chase the best available rate.
Minimum balances and account fees
Some banks advertise a high APY but only pay it on balances above a certain threshold—often $25,000 or $100,000. Below that minimum, the rate drops dramatically. Read the fine print before opening an account to confirm the rate applies to your balance size.
Most online savings accounts have no monthly fees, but some traditional banks charge $5 to $15 per month if your balance falls below a minimum. A $10 monthly fee on a $1,000 balance earning 4.5% APY ($45 per year) wipes out most of your interest. Always check for fees before depositing money.
Some banks waive fees if you set up direct deposit or maintain a linked checking account. Others waive fees for customers above a certain age or with a certain account type. The fee structure varies widely, so compare the full picture—APY, minimum balance, and fees—not just the advertised rate.
Frequently Asked Questions
How often is interest paid into my account?
Most banks calculate interest daily but credit it monthly or quarterly. You will see the interest added to your balance on a specific day each month, usually the last day or the first day of the next month. Some banks credit interest quarterly (every three months). Check your bank's disclosure to confirm the schedule.
Can I lose money in a savings account?
No. Your principal balance is protected by FDIC insurance (up to $250,000 per depositor per bank) or NCUA insurance if you use a credit union. Interest rates can fall, so you earn less, but your original deposit cannot shrink due to interest rate changes. The only way to lose money is if you withdraw more than you deposited.
Is the APY I see may provide?
No. Banks change rates frequently, sometimes weekly. The rate you see today may be lower next week. Some banks may provide a rate for a set period only if you open a CD. For regular savings accounts, the rate is variable and can change at any time without notice.
What's the difference between APY and APR?
APY (annual percentage yield) includes compounding—interest earned on interest. APR (annual percentage rate) does not. For savings accounts, you want APY because it shows your true earnings. APR is typically used for loans and credit cards, where it works against you.
Should I move my savings to a higher-rate bank?
If your current bank's rate is more than 1% below the best available rate, moving makes financial sense. On a $10,000 balance, a 1% difference equals $100 per year. Opening a new account takes 10 to 15 minutes online, and transferring money takes one to three business days. There is no cost to switch.