What you earn depends on the account's APY, how much you deposit, and how long the money sits there
The amount of interest you make in 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 paying 4.5% APY on $10,000 will pay you roughly $450 per year—but that's only if the balance stays at $10,000 the whole time. If you withdraw money or add money partway through, the interest recalculates based on what's actually in the account each day.
Interest compounds, meaning you earn interest on the interest you've already earned. Most savings accounts compound daily, so the interest gets added to your balance every day, and tomorrow's interest is calculated on today's larger balance. This compounding effect is small at first but grows over months and years.
Key Takeaways
- Interest earned equals your balance multiplied by the APY, divided by 365 days—so a $5,000 balance at 4.5% APY earns about $225 per year, or roughly $0.62 per day.
- The APY varies by bank and changes over time; online banks typically offer higher rates than brick-and-mortar banks, sometimes by 1% or more.
- Deposits and withdrawals change your daily balance, so the interest you earn that month is based on the average balance, not the starting balance.
- Compounding happens daily at most banks, so interest earned each day gets added to your balance and earns interest itself the next day.
- Your bank will report interest earned on a 1099-INT form at tax time if you earned $10 or more in interest during the year.
How the math works: balance, rate, and time
The basic formula is: Interest = Balance × APY ÷ 365. If you have $20,000 in an account paying 4.5% APY, you earn $20,000 × 0.045 ÷ 365 = $2.47 per day. Over a year, that's roughly $900.
But that assumes your balance stays at $20,000 every single day. If you withdraw $5,000 on day 50, the bank recalculates. For the first 49 days you earned interest on $20,000; for the remaining 316 days you earn interest on $15,000. The total interest for the year would be lower than $900.
Most banks calculate interest daily but pay it monthly or quarterly. When they pay it, that interest gets added to your balance, and from that point forward you earn interest on the larger amount. This is compounding. Over a year, compounding adds a small but real boost to your earnings—usually less than 0.1% extra, but it grows over time.
Why APY varies so much between banks
Online banks typically offer higher APY than traditional banks because they have lower overhead costs—no branch buildings, fewer employees, no tellers. A brick-and-mortar bank might offer 0.01% APY while an online bank offers 4.5% APY on the same type of account. That difference means $10 per year on a $100,000 balance versus $4,500 per year.
APY also changes based on what the Federal Reserve does with interest rates. When the Fed raises rates, banks raise the APY they offer on savings accounts to attract deposits. When the Fed cuts rates, banks lower their APY. This can happen several times per year, so the rate you see today may not be the rate you earn six months from now.
Some banks offer promotional rates—a higher APY for a limited time, usually three to six months—to attract new customers. After the promotion ends, the rate drops to the bank's standard rate. Read the terms carefully to see when the promotional rate expires.
How deposits and withdrawals affect your interest
Banks calculate interest based on your daily balance, not your opening or closing balance. If you start the month with $10,000, deposit $5,000 on day 15, and withdraw $3,000 on day 25, the bank tracks your balance each day and calculates interest accordingly.
This means timing matters. If you deposit money early in the month, it earns interest for more days. If you withdraw money late in the month, you lose interest on that amount for most of the month. Some people move money into savings accounts a few days before the interest is paid to maximize earnings, but the effect is usually small—a few cents at most.
What happens when interest is paid and compounded
Most savings accounts pay interest monthly, though some pay quarterly or even daily. When the bank pays interest, it adds the amount to your account balance. From that point forward, you earn interest on the larger balance.
For example: You have $10,000 at 4.5% APY. After one month, the bank adds roughly $37.50 in interest (4.5% ÷ 12 months). Your new balance is $10,037.50. In month two, you earn interest on $10,037.50, not just the original $10,000. The difference is tiny—about $0.14 more—but over a year it compounds into a meaningful boost.
This is why the APY (annual percentage yield) is more useful than the APR (annual percentage rate). The APY already accounts for compounding, so it tells you the true annual return. The APR does not.
Real examples: what different balances earn
| Balance | APY | Annual Interest (approximate) | Monthly Interest (approximate) |
|---|---|---|---|
| $1,000 | 4.5% | $45 | $3.75 |
| $5,000 | 4.5% | $225 | $18.75 |
| $10,000 | 4.5% | $450 | $37.50 |
| $50,000 | 4.5% | $2,250 | $187.50 |
| $100,000 | 4.5% | $4,500 | $375 |
These figures assume the balance stays constant and the APY remains 4.5% for the full year. If the APY drops to 3.5% midway through the year, your actual earnings would be lower. If you add money or withdraw money, the calculation changes based on your daily balance.
The table shows why balance size matters so much. A $100,000 account earns roughly 100 times more than a $1,000 account at the same rate. Even small differences in APY compound over time—a 1% difference on $50,000 means $500 per year in lost earnings.
How to find the best rate for your situation
Compare APY across banks before you deposit. Online banks, credit unions, and some traditional banks publish their current rates on their websites. The difference between 0.5% and 4.5% APY is enormous on large balances—$500 per year on a $100,000 deposit.
Check whether the rate is promotional or permanent. A promotional rate might be 5% for three months, then drop to 0.5%. If you plan to keep the money in the account for years, the long-term rate matters more than the promotional rate.
Verify that the bank is FDIC-insured (for banks) or NCUA-insured (for credit unions). This protects your deposits up to $250,000 if the institution fails. A slightly higher APY is not worth losing deposit insurance protection.
Interest and taxes
Interest you earn in a savings account is taxable income. If you earn $10 or more in interest during a calendar year, the bank will send you a 1099-INT form by January 31 of the following year. You report this interest on your tax return as ordinary income.
The amount of tax you owe depends on your overall income and tax bracket. If you earn $500 in interest and you're in the 22% tax bracket, you'll owe roughly $110 in federal income tax on that interest (plus any state income tax, depending on where you live). This is one reason why the actual return on a savings account is lower than the APY suggests—you keep only the after-tax amount.
Frequently Asked Questions
Can I earn interest on interest in a savings account?
Yes. When the bank pays you interest, it adds the amount to your balance. The next time interest is calculated, you earn interest on that larger balance. This is compounding. The effect is small in the short term but grows over years.
What's the difference between APY and APR for savings accounts?
APY (annual percentage yield) includes the effect of compounding, so it shows your true annual return. APR (annual percentage rate) does not account for compounding. Banks must disclose APY for savings accounts, so always compare APY, not APR.
Does the bank pay interest on money I just deposited?
Yes, but only for the days it sits in the account. If you deposit $5,000 on day 20 of the month, you earn interest on that $5,000 for the remaining 10 or 11 days of the month. Interest is calculated daily at most banks.
Will my interest earnings change if the bank lowers its APY?
Yes. The interest you've already earned stays in your account, but future interest is calculated at the new, lower rate. If your APY drops from 4.5% to 3.5%, your monthly interest earnings will drop by roughly one-fifth.
Do I have to report savings account interest on my taxes?
If you earn $10 or more in interest during the year, the bank reports it to the IRS on a 1099-INT form, and you must report it on your tax return as income. Even if you earn less than $10, you should report it if you file a return.