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 calculated by multiplying your balance by the annual percentage yield (APY) the bank offers, then dividing by 365 days. If you keep $10,000 in an account with a 4.5% APY for a full year without touching it, you earn $450. If you deposit that same $10,000 for only six months, you earn roughly $225. The catch: most banks compound interest daily or monthly, meaning you earn a small amount of interest on the interest you've already earned—but the difference is usually just a few dollars on typical balances.
The APY varies dramatically between banks. A traditional bank branch might offer 0.01% APY on a regular savings account, which means $10,000 earns $1 per year. An online bank offering a high-yield savings account might offer 4.5% to 5.35% APY on the same $10,000, earning $450 to $535 per year. The difference between these two accounts is real money, and it compounds over time. After five years, the traditional bank account has earned $5 total; the high-yield account has earned roughly $2,500 (assuming the rate stays constant and you don't add or withdraw funds).
Key Takeaways
- Your earnings equal your balance multiplied by the APY, divided by 365—so a $5,000 balance at 4.5% APY earns about $225 per year.
- Online banks typically offer APY rates between 4% and 5.35%, while traditional bank branches often offer less than 0.5% APY.
- Interest compounds daily or monthly at most banks, meaning you earn small returns on the interest you've already earned.
- The APY changes when the bank changes its rate, so your earnings will increase or decrease if rates rise or fall.
- Money market accounts and certificates of deposit (CDs) often pay higher rates than regular savings accounts, but may have withdrawal limits or lock-in periods.
How banks set the rates they offer
Banks set savings account rates based on what the Federal Reserve charges them to borrow money. When the Fed raises its benchmark rate, banks eventually raise the rates they pay on savings accounts—but not always by the same amount, and not always immediately. When the Fed cuts rates, banks often drop savings rates faster than they raised them. This means the APY you see today may not be the APY you see in three months.
Online banks tend to pass rate changes to customers faster than brick-and-mortar branches because they have lower overhead costs and compete directly on rate. A traditional bank might offer 0.05% APY while an online competitor offers 4.75% APY for the exact same type of account. The online bank can afford to pay more because it doesn't maintain physical branches. If you're keeping money in a savings account earning less than 1% APY, switching to an online bank could earn you 40 to 50 times more interest on the same balance.
How much interest you earn on different account balances
The table below shows what you would earn annually at two different rates, assuming no deposits or withdrawals during the year. These figures assume the rate stays constant for the full year. In reality, rates change, and most people add or withdraw money throughout the year. If you deposit $5,000 in January and another $5,000 in July, your average balance for the year is lower than $10,000, so your interest earnings are lower too.
| Balance | At 0.05% APY (typical branch bank) | At 4.5% APY (typical online bank) | Annual difference |
|---|---|---|---|
| $1,000 | $0.50 | $45 | $44.50 |
| $5,000 | $2.50 | $225 | $222.50 |
| $10,000 | $5 | $450 | $445 |
| $25,000 | $12.50 | $1,125 | $1,112.50 |
| $50,000 | $25 | $2,250 | $2,225 |
Banks calculate interest on your actual daily balance, so every deposit increases your earnings going forward, and every withdrawal decreases them. If you move $5,000 out of your account midway through the year, you lose interest on that $5,000 for the remaining months. The bank tracks this automatically—you don't have to calculate anything yourself.
Why some accounts pay more than others
High-yield savings accounts pay more than regular savings accounts because banks use them to attract deposits. When a bank needs more customer money to lend out, it raises the rate on savings accounts to draw deposits. When a bank has plenty of deposits, it can afford to lower the rate. This is why rates fluctuate and why different banks offer wildly different rates at the same time.
Money market accounts often pay slightly more than savings accounts because they require a higher minimum balance—sometimes $2,500 or $10,000. Certificates of deposit (CDs) typically pay the highest rates of all savings products because you agree to lock your money away for a set period (three months, six months, one year, five years). If you withdraw early, you pay a penalty that eats into your interest earnings. The longer the lock-in period, the higher the rate—a five-year CD might pay 4.8% APY while a three-month CD pays 4.2% APY.
How interest compounds and grows over time
Compounding means you earn interest on your interest. If your account compounds daily, the bank calculates interest on your balance each day and adds it to your account. The next day, you earn interest on the slightly larger balance. Over a year, this daily compounding adds up to more than if the bank simply calculated interest once at the end of the year.
The difference between daily and monthly compounding is small on typical balances. On $10,000 at 4.5% APY, daily compounding earns about $460 over a year, while monthly compounding earns about $459. The extra dollar matters more when you have a larger balance or a longer time horizon. Over five years, that extra dollar per year becomes $5 or more. Most banks compound daily, so you don't have to choose—but it's worth checking your account terms to confirm how often interest is calculated and when it's added to your balance.
What happens when rates change
When a bank lowers its APY, the new rate applies to your existing balance immediately—you don't have to do anything. Your interest earnings drop right away. If you had $10,000 earning 4.5% APY and the bank cuts the rate to 4.0% APY, your annual earnings drop from $450 to $400. This is why it's worth checking your account's current rate every few months. If your bank has dropped its rate significantly below what competitors offer, moving your money to a higher-paying account takes about 15 minutes and can earn you hundreds of dollars more per year.
When rates rise, your earnings increase automatically too. If the Fed raises rates and your bank raises its APY from 4.0% to 4.5%, you start earning the higher amount on your next interest payment. You don't have to reopen the account or sign new paperwork. The rate change is permanent until the bank changes it again. Some banks notify customers of rate changes by email or through their app, while others don't announce them at all—so checking your account terms periodically helps you stay aware of what you're actually earning.
Frequently Asked Questions
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 each January if you earned $10 or more in interest during the previous year. You report this interest on your tax return. The tax rate depends on your overall income and tax bracket.
Can I lose money in a savings account?
No, you cannot lose the principal you deposit. Savings accounts are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor per bank. However, if inflation rises faster than your interest rate, the purchasing power of your money decreases—meaning your $10,000 buys less than it did a year ago, even though you still have $10,000.
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. Banks use APY for savings accounts because it shows the true amount you earn. APR is used for loans and credit cards. Always look for APY when comparing savings accounts.
Does keeping more money in savings earn you more interest?
Yes. Interest is calculated on your balance, so $50,000 at 4.5% APY earns $2,250 per year, while $10,000 at the same rate earns $450 per year. The rate stays the same, but the dollar amount you earn increases with your balance.
How often is interest added to my account?
Most banks add interest monthly, though some add it daily or quarterly. Even if interest compounds daily, it may only be deposited to your account once a month. Check your account terms or ask your bank when interest is credited to your balance.