What you earn depends on the bank's rate, how much you deposit, and how long the money sits there

The amount of interest you earn on a savings account is determined by three things: the annual percentage yield (APY) the bank offers, the balance you keep in the account, and how long that money stays there. A bank offering 4.5% APY on $10,000 will pay you roughly $450 per year, but only if the rate stays the same and you don't withdraw the money. The actual dollar amount varies by bank—some offer 0.01% APY, others offer 5% or higher—and rates change frequently, sometimes weekly.

Interest compounds, meaning you earn interest on the interest you've already earned. With daily compounding (the most common method), your balance grows a little bit each day. Over a year, this compounding effect adds up, but the difference between daily and monthly compounding is small for most account sizes. The longer your money stays in the account untouched, the more compounding works in your favor.

Key Takeaways

  • The interest you earn equals the APY rate multiplied by your account balance, so a 4% APY on $5,000 earns roughly $200 per year.
  • Online banks typically offer higher APY rates (currently 4% to 5.35%) than brick-and-mortar banks (often 0.01% to 0.5%), because they have lower overhead costs.
  • Interest compounds daily at most banks, meaning you earn interest on previously earned interest, which increases your total earnings over time.
  • Withdrawals reduce your balance and therefore reduce the interest you earn, so money you might need soon earns less than money you can leave untouched.
  • Banks can change their APY at any time, so the rate you see today may be lower next month or next year.

How to calculate what you'll earn

The basic formula is simple: multiply your account balance by the APY, then divide by 12 if you want a monthly estimate. A $20,000 balance at 4.5% APY earns roughly $900 per year, or $75 per month. But this assumes the balance stays constant and the rate doesn't change.

In reality, your balance fluctuates as you deposit and withdraw money. If you start with $10,000 at 4.5% APY and add $500 each month, you'll earn more than if you kept $10,000 untouched. Banks calculate interest daily based on your ending balance each day, so deposits made early in the month earn more than deposits made late in the month.

Most banks show you the interest earned in your account statement or online dashboard. You can also use a savings calculator on the bank's website, which lets you enter your starting balance, monthly deposits, and the APY to see a projection. These projections assume the rate stays constant, which it won't—but they give you a reasonable estimate for planning purposes.

Why rates vary so much between banks

Online banks pay higher interest than traditional banks because they don't operate physical branches. A brick-and-mortar bank pays for building leases, tellers, and branch managers. An online bank has one or two data centers and customer service staff working remotely. That cost difference gets passed to you as a higher APY.

Credit unions sometimes offer competitive rates, but not always. Some credit unions pay 4% or higher on savings; others pay less than 1%. It depends on the union's size, its funding sources, and its lending strategy. You have to check each one individually.

Banks also adjust rates based on what the Federal Reserve does. When the Fed raises its benchmark rate, banks typically raise their savings APY within days or weeks. When the Fed cuts rates, banks cut savings rates too—sometimes immediately, sometimes after a delay. This means the highest-paying account today might not be the highest-paying account in six months.

High-yield savings accounts versus regular savings accounts

A high-yield savings account is simply a savings account with a higher APY than the bank's standard offering. There's no official definition—one bank's "high-yield" account might pay 4.5%, another might pay 5.35%. The term is marketing language, not a product category with legal requirements.

The tradeoff is usually minimal. High-yield accounts often have the same FDIC insurance ($250,000 per depositor), the same withdrawal rules, and the same access to your money. Some require a higher opening deposit ($500 to $2,500 is common), and some limit the number of withdrawals per month, but many have no restrictions at all.

A regular savings account at the same bank typically pays 0.01% to 0.5% APY. Over a year, the difference between a regular account and a high-yield account is substantial. On $50,000, a 0.01% account earns $5 per year; a 4.5% account earns $2,250. That's the entire difference in overhead costs passed to you.

What happens to your interest if you withdraw money

Interest is calculated daily based on your balance at the end of each day. If you withdraw $5,000 midway through the month, you stop earning interest on that $5,000 from that day forward. You keep the interest you've already earned, but future interest is calculated on the smaller balance.

Some accounts have withdrawal limits. Older savings account regulations allowed banks to limit withdrawals to six per month; those rules were suspended in 2020 and have not been reinstated. Most banks now allow unlimited withdrawals, but a few still impose limits or charge fees for excess withdrawals. Check your account terms before opening.

If you think you'll need the money within a few months, a high-yield savings account is still better than a checking account (which typically earns 0% or close to it). But if you need the money within days, the interest earned is negligible—a few cents on most balances.

Money market accounts and CDs as alternatives

A money market account is a hybrid between a savings account and a checking account. It usually pays interest similar to a high-yield savings account (currently 4% to 5.35% at competitive banks), but it also comes with a debit card and check-writing privileges. The tradeoff is that some money market accounts have higher minimum balances ($2,500 to $10,000) and may limit withdrawals.

A certificate of deposit (CD) pays a fixed APY for a set period—typically three months to five years. Current CD rates range from 4.5% to 5.5% depending on the term length. The catch is that you can't withdraw the money without penalty until the term ends. If you withdraw early, the bank deducts the penalty from your interest earnings or principal. CDs make sense only if you know you won't need the money for the full term.

For most people, a high-yield savings account is the best choice because it offers competitive interest, no withdrawal penalties, and access to your money if an emergency happens. Money market accounts and CDs are worth considering if you have specific goals—a money market account if you want check-writing, a CD if you're certain you won't need the money for several years.

How inflation affects what your interest actually buys you

Interest earnings are only meaningful if they outpace inflation. If inflation is running at 3% per year and your savings account earns 2%, you're losing purchasing power—your money buys less next year than it does today, even though the account balance went up.

Current savings rates (4% to 5.35% at competitive banks) are higher than inflation, which has cooled to around 3% annually. This means your savings account is actually gaining purchasing power. But this won't last forever. When inflation rises or the Fed cuts rates, savings rates will fall, and you may find yourself earning less than inflation again.

This is why it matters to shop around. The difference between a 0.5% account and a 4.5% account is $4,000 per year on a $100,000 balance. That's real money that either stays in your pocket or goes to the bank.

Frequently Asked Questions

How often do banks pay interest on savings accounts?

Interest compounds daily at most banks, meaning it's calculated and added to your balance every day. However, the total interest is usually deposited into your account monthly. Some banks deposit quarterly or annually. Check your account statement or the bank's website to see your deposit schedule.

Do I have to pay taxes on savings account interest?

Yes. Interest earned on a savings account is taxable income. Banks send you a 1099-INT form at the end of the year if you earned $10 or more in interest. You report this on your tax return. The tax rate depends on your overall income and tax bracket.

Can a bank lower my interest rate after I open the account?

Yes. Banks can change APY rates at any time without notice, though most give customers a few days' warning. If rates drop, you can move your money to a different bank offering a higher rate. There's no penalty for switching banks or closing a savings account.

What's the difference between APY and APR on a savings account?

APY (annual percentage yield) includes the effect of compounding, while APR (annual percentage rate) does not. For savings accounts, APY is the number that matters because it shows what you'll actually earn. APR is used for loans and credit cards.

Is my money safe if I keep it in a high-yield savings account?

Yes, as long as the bank is FDIC-insured. FDIC insurance protects up to $250,000 per depositor per bank. If the bank fails, the FDIC reimburses you. Most online banks and traditional banks are FDIC-insured. Check the bank's website or the FDIC's bank search tool to confirm.