What you earn depends on the bank, the account type, and the current rate environment

The amount of interest a savings account earns is not fixed. It changes based on three things: the annual percentage yield (APY) the bank offers, how much money you keep in the account, and how long you leave it there. Right now, savings accounts at online banks typically pay between 4% and 5.35% APY, while brick-and-mortar banks often pay 0.01% to 0.05%. The difference is real money—on $10,000, that gap means $400 to $500 per year versus $1 to $5.

Banks set their own rates based on what the Federal Reserve does with its benchmark rate. When the Fed raises rates, banks eventually raise what they pay you. When the Fed cuts rates, banks cut what they pay you—sometimes quickly, sometimes slowly. Your rate can also change without warning; banks are not required to give you advance notice before lowering APY on existing accounts.

Interest compounds, which means you earn interest on your interest. If your account compounds daily (the most common method), the bank calculates what you owe each day and adds it to your balance. Monthly and quarterly compounding are less common but still exist. The more often interest compounds, the slightly more you earn, though the difference is usually small.

Key Takeaways

  • Online banks currently pay 4% to 5.35% APY on savings accounts, while traditional banks typically pay under 0.1%, a difference of hundreds of dollars per year on the same balance.
  • Your rate is not locked in—banks can lower it at any time, and rates move when the Federal Reserve changes its benchmark rate.
  • Interest compounds (usually daily), meaning you earn returns on money you already earned, though the compounding frequency matters less than the base APY.
  • The actual dollars you earn depend on your balance, how long you keep the money there, and whether you add to the account or withdraw from it.

How to calculate what you will earn

The formula is straightforward: multiply your balance by the APY, then divide by 365 (or the number of days in the year). That gives you the interest earned per day. If your account compounds daily, that daily amount gets added to your balance, and tomorrow's calculation includes today's interest.

Example: You have $5,000 in an account paying 5% APY. Divide 5% by 365 days: that is roughly 0.0137% per day, or about $0.69 per day. After 30 days, you would have earned roughly $20.70 (before compounding effects). After a full year without adding or removing money, you would have $5,250.

Most banks show you the projected annual earnings in their account disclosures or on their website. Some provide calculators. The number they show assumes your balance stays the same for the entire year—if you add money or withdraw, the calculation changes. Money you deposit partway through the month earns interest only from the day it arrives.

Why rates vary so much between banks

Online banks pay more because they have lower overhead. They do not maintain physical branches, do not employ as many staff, and do not spend money on real estate. They pass those savings to customers by offering higher APY. Traditional banks have higher costs and often use deposits to fund loans at higher rates, so they do not need to compete on savings rates.

Some banks also use savings rates as a loss leader—they pay high rates to attract deposits, then make money by lending that money out at even higher rates. Others are simply competing for market share in a particular region or customer segment.

Account type matters too. Money market accounts sometimes pay slightly more than regular savings accounts. High-yield savings accounts are designed to pay more. Certificates of deposit (CDs) lock your money away for a set term and often pay more than savings accounts because the bank knows it can use your money for longer. Regular savings accounts are the baseline and typically pay the least.

What happens when the Federal Reserve changes rates

The Federal Reserve does not set savings account rates directly. Instead, it sets the federal funds rate—the rate banks charge each other for overnight loans. When the Fed raises this rate, banks have more incentive to raise what they pay depositors, because they can earn more by lending money out. When the Fed cuts rates, banks cut what they pay you.

The lag between a Fed move and a bank's response varies. Some online banks raise rates within days. Others take weeks or months. When rates fall, banks often cut quickly—sometimes within a week. This asymmetry means you benefit faster from rate increases but lose ground quickly when rates drop.

The Fed has raised rates significantly since 2022, which is why savings rates are currently much higher than they were in 2020 and 2021. If the Fed begins cutting rates, expect the rates you earn to fall as well.

How to find the highest rate available right now

Check the websites of online banks directly. Major options include Marcus by Goldman Sachs, Ally Bank, American Express Personal Savings, Discover Bank, and Capital One 360. Each publishes its current APY on the account page. Rates change frequently, so the rate you see today may not be the rate you get tomorrow.

Comparison sites like Bankrate, DepositAccounts, and DepositAccounts.com track rates across multiple banks and update them regularly. These sites can show you which banks are currently paying the most, though they may not include every institution.

If you already have a checking account at a bank, check whether that bank offers a linked savings account. You may not get the highest rate available, but you will have the convenience of managing both accounts in one place. The trade-off between convenience and rate depends on how much money you are saving and how much the rate difference costs you annually.

What to watch for when comparing accounts

APY is the main number, but check the fine print. Some banks pay a promotional rate for the first few months, then drop to a much lower rate. Others require a minimum balance to earn the advertised rate—if your balance falls below that threshold, you earn a lower rate or no interest at all. A few banks charge monthly fees that can eat into your earnings.

Confirm that the bank is FDIC insured (or NCUA insured if it is a credit union). This means your deposits are protected up to $250,000 if the bank fails. Most online banks are insured, but it is worth verifying.

Read the terms about how often interest is credited to your account. Most credit daily, but some credit monthly or quarterly. This affects how quickly your balance grows, though the difference is usually small over a year.

How inflation affects what your savings are actually worth

Interest rate alone does not tell you whether your money is growing in real terms. You also need to consider inflation—the rate at which prices rise. If inflation is 3% and your savings account pays 5% APY, your money is growing in real purchasing power. If inflation is 5% and your account pays 4%, you are losing ground.

Right now, inflation is lower than it was in 2022 and 2023, but it is still above zero. This means that even a 5% savings rate is not keeping pace with inflation perfectly—your money is growing, but it is not buying as much as it would have a year ago. This is why savings accounts are meant for money you need to access soon, not long-term wealth building.

Frequently Asked Questions

Can a savings account rate go down after I open it?

Yes. Banks can lower the APY on your account at any time without your permission, though most give 30 days' notice. Your existing balance is not affected—you just earn less interest going forward. If a rate drops significantly, you can move your money to a different bank.

Is the interest I earn taxable?

Yes. Interest earned in a savings account is ordinary income and must be reported on your tax return. The bank will send you a 1099-INT form at the end of the year if you earned $10 or more in interest. This is one reason high-yield savings accounts matter—earning 5% instead of 0.05% means significantly more taxable income, but also significantly more money in your account.

What is the difference between APY and APR for a savings account?

APY (annual percentage yield) includes the effect of compounding. APR (annual percentage rate) does not. For savings accounts, always look at APY, because that is what you actually earn. APR is used for loans and credit cards.

Do I lose interest if I withdraw money before the end of the year?

No. Savings accounts do not penalize early withdrawal. You earn interest on the money you had in the account for the time it was there. If you deposit $5,000 on January 1 and withdraw it on June 30, you earn six months of interest on $5,000, not a full year.

Why do some banks offer promotional rates that are much higher?

Banks use promotional rates to attract new customers. The high rate typically lasts three to twelve months, then drops to the bank's standard rate. If you are considering a promotional offer, read the terms carefully to see when the rate changes and what the ongoing rate will be.