What you earn depends on the bank, the account type, and the current rate environment
The amount of interest a savings account draws 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. A bank might offer 0.01% APY on a basic savings account while an online bank offers 4.50% APY on the same type of account in the same month. The difference between those two rates means $100 in one account earns $0.10 per year, while $100 in the other earns $4.50 per year.
Banks set their own rates based on what the Federal Reserve does with its benchmark rate. When the Fed raises rates, banks usually raise savings rates too—but not always by the same amount. A big bank might lag behind an online bank by months. When the Fed cuts rates, savings rates fall across the board, though again at different speeds. This is why checking rates regularly matters: the best rate today might not be the best rate in three months.
Key Takeaways
- Interest earned is calculated by multiplying your account balance by the APY and dividing by 365 days, so a $10,000 balance at 4.50% APY earns roughly $450 per year, or about $1.23 per day.
- Online banks typically offer higher APY than brick-and-mortar banks because they have lower overhead costs, though both types can change rates without notice.
- Interest compounds daily or monthly depending on the bank's terms, meaning you earn interest on the interest you already earned—the effect is small on savings accounts but real over time.
- The rate you see advertised is only may provide for new deposits at some banks; existing balances may earn a different rate, so read the terms before opening an account.
- Rates change frequently and are not locked in, so a 4.50% account today might pay 3.75% in six months if the Fed cuts rates.
How the math works: calculating your actual earnings
Interest on a savings account is calculated using the formula: (Balance × APY) ÷ 365 = Daily Interest Earned. If you have $5,000 in an account paying 4.00% APY, you earn ($5,000 × 0.04) ÷ 365 = $0.55 per day. Over a year, that's roughly $200. If the same account paid 0.50% APY, you'd earn about $25 per year.
Most banks compound interest daily or monthly. Compounding means the bank calculates interest on your balance plus any interest you've already earned. On a savings account, this effect is small—the difference between daily and monthly compounding on $5,000 at 4.00% APY is only a few dollars per year. But it adds up over time, especially if you never withdraw money. A $10,000 balance at 4.50% APY compounded daily earns about $460 per year, while the same balance compounded monthly earns about $458.
Why rates vary so much between banks
Online banks almost always pay more than traditional banks. An online bank has no branches, no tellers, and no physical real estate to maintain. Those savings get passed to depositors as higher APY. A traditional bank with hundreds of branches has higher costs and often pays less on savings accounts. In the same month, you might see 4.50% at an online bank and 0.15% at a major national bank.
Credit unions sometimes offer competitive rates, though not always. Some credit unions pay well above the national average; others pay less. The rate depends on the credit union's size, its funding needs, and its business model. You have to check each one individually.
Banks also use rates as a marketing tool. A new online bank might offer a promotional rate—say 5.00% APY—for the first three months to attract deposits, then drop it to 4.25%. Read the fine print to see whether the advertised rate applies to all deposits or only new money, and whether it's temporary.
How rates change and what triggers a change
The Federal Reserve sets a target range for the federal funds rate, which is the interest rate banks charge each other for overnight loans. This rate influences—but does not directly control—what banks pay on savings accounts. When the Fed raises its rate, banks have more incentive to raise savings rates because they can earn more on their own investments. When the Fed cuts rates, banks cut savings rates because they earn less.
The lag between a Fed move and a bank's response varies. Some online banks raise rates within days of a Fed increase. Traditional banks might wait weeks or months, or might not raise rates at all if they have plenty of deposits already. When the Fed cuts rates, banks cut savings rates much faster—sometimes within days—because they want to keep more of the interest spread for themselves.
Banks can also change rates without any Fed action. If a bank needs more deposits, it might raise rates to attract them. If a bank has too many deposits and doesn't need more, it might cut rates. You have no control over this, and the rate you see advertised is not locked in. A bank can lower your rate with notice—usually 30 days—though some banks grandfather existing balances at the old rate for a period of time.
Comparing accounts: what to look for beyond the headline rate
The APY is the most important number, but not the only one. Check whether the rate applies to your entire balance or only to balances above a certain threshold. Some banks pay 4.50% on balances up to $100,000 and 2.00% on anything above that. Others pay the same rate on all balances. A few banks pay higher rates on larger balances.
Look at the minimum balance requirement. Some accounts require $1 to open; others require $25,000. If you can't meet the minimum, you won't be able to open the account. Some banks waive the minimum for direct deposit or for keeping a linked checking account open.
Check the withdrawal rules. Most savings accounts allow six withdrawals per month without penalty, though this rule has loosened in recent years. Some banks charge a fee for excess withdrawals; others simply close the account. If you think you'll need frequent access to your money, this matters.
The difference between savings accounts and other interest-bearing products
A savings account is not the only place to earn interest. Money market accounts often pay the same rate as savings accounts but come with a debit card and checkbook. Certificates of deposit (CDs) lock your money away for a set term—three months, six months, one year, five years—and pay a higher rate in exchange. A one-year CD might pay 5.00% while a savings account at the same bank pays 4.25%.
High-yield savings accounts are just savings accounts with higher APY; they're not a different product. The term "high-yield" is marketing language for "we pay more than the national average." There's no official definition, so one bank's high-yield account might pay less than another bank's regular savings account.
Treasury bills and money market funds are not bank products and don't carry FDIC insurance, but they can pay competitive rates. A three-month Treasury bill might pay 5.30% while a savings account pays 4.50%. The tradeoff is that your money is locked up for the term, and you have to buy and sell through a brokerage or the government's website.
How to track your earnings and make sure you're getting paid
Banks send interest to your account monthly or quarterly, depending on the account. You can see the deposit in your transaction history. The amount should match what you calculated using the formula above, give or take a few cents depending on how the bank rounds.
If you notice the interest payment is much lower than expected, check whether the bank changed your rate. Log into your account and look for the current APY. If it's lower than what you thought, the bank likely lowered it. If the rate is the same but the payment is lower, contact the bank and ask them to explain the calculation.
Some banks let you set up alerts when your balance reaches a certain amount or when your rate changes. This is useful if you're shopping for a better rate and want to know when it's time to move your money. Moving money between banks is free and takes three to five business days using an ACH transfer.
Frequently Asked Questions
Is the interest rate I see may provide, or can the bank change it?
The bank can change the rate at any time with notice, usually 30 days. The rate you see advertised is not locked in. Some banks grandfather existing balances at the old rate for a limited time, but most apply the new rate to all balances once the notice period ends. Check your account terms to see what the bank's policy is.
How often is interest added to my account?
Most banks add interest monthly or quarterly. Some add it daily but only credit it monthly. The frequency doesn't change how much you earn over a year—it only affects when you see the money. Daily compounding earns slightly more than monthly compounding, but the difference is small on savings accounts.
Do I have to pay taxes on savings account interest?
Yes. Interest 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 amount you owe in taxes depends on your tax bracket and your total income.
What happens to my interest if I withdraw money mid-month?
Most banks calculate interest based on your average daily balance for the month. If you withdraw money on the 15th, you earn interest on the full balance for the first 15 days and the lower balance for the remaining days. The interest is still added at the end of the month, but it's less than if you'd kept the full balance the whole time.
Can I move my money to a higher-paying account without losing interest?
Yes. Interest accrues up to the day you withdraw the money. Once you transfer it to another bank, the new bank starts paying interest at its rate. There's no penalty for moving money between savings accounts, and the transfer takes three to five business days. You don't lose any interest in the process.