What determines how much interest you earn
The amount of interest you earn depends on three things: the annual percentage yield (APY) your bank offers, how much money you have in the account, and how long it stays there. A bank with a 4.5% APY will pay you more than a bank with 0.01% APY on the same balance. The difference between these two is real money—on $10,000, that's roughly $450 per year versus $1 per year.
Banks set their own APY rates based on what the Federal Reserve charges them to borrow money. When the Fed raises rates, banks usually raise savings APY within weeks. When the Fed cuts rates, banks often cut savings APY faster than they cut rates on mortgages or car loans. This means the APY you see today may not be the APY you see in six months.
Interest compounds, which means you earn interest on your interest. If your account compounds daily (the most common method), the bank calculates interest every single day and adds it to your balance. That new balance then earns interest the next day. Over a year, daily compounding adds slightly more money than monthly or annual compounding, but the difference is usually small unless your balance is very large.
Key Takeaways
- Your interest earnings equal your balance multiplied by the APY, divided by 365 days—so a $5,000 balance at 4.5% APY earns roughly $225 per year.
- Online banks typically offer higher APY than brick-and-mortar banks because they have lower overhead costs.
- APY changes when the Federal Reserve changes interest rates, so the rate you lock in today will likely be different in six months.
- Money market accounts and certificates of deposit (CDs) often pay higher APY than regular savings accounts, but with different rules about when you can withdraw.
How to calculate your annual interest earnings
The formula is straightforward: multiply your account balance by the APY, then divide by 365. If you have $10,000 at 4.5% APY, the math is $10,000 × 0.045 ÷ 365 = $1.23 per day, or roughly $450 per year. This assumes your balance stays the same all year. If you add money or withdraw money, the interest you earn changes proportionally.
Most banks show you the interest you've earned so far in your current statement. You can also use an online savings calculator—search "savings interest calculator"—and plug in your balance and the bank's APY to see what you'd earn over different time periods. These calculators assume the APY stays the same, which it won't, but they give you a realistic picture of the ballpark.
If your bank compounds daily, you'll earn slightly more than the simple formula shows because each day's interest gets added to your balance and earns interest the next day. Over a year on a $10,000 balance at 4.5% APY with daily compounding, you'd earn about $460 instead of $450. The difference grows larger with bigger balances and higher rates.
Where to find the highest APY
Online banks and online divisions of traditional banks almost always offer higher APY than in-person branches. As of late 2024, online savings accounts range from 4.0% to 5.3% APY depending on the bank and market conditions. Traditional brick-and-mortar banks typically offer 0.01% to 0.5% APY on regular savings accounts. The gap exists because online banks don't pay for physical branches, tellers, or as much staff.
Money market accounts often pay slightly higher APY than savings accounts at the same bank, sometimes 0.25% to 0.5% more. The tradeoff is that money market accounts usually require a higher minimum balance and may limit how many withdrawals you can make per month. Certificates of deposit (CDs) lock your money away for a set period—three months, six months, one year, five years—and pay higher APY in exchange. A one-year CD might pay 4.8% while a savings account at the same bank pays 4.5%.
To compare APY across banks, visit each bank's website and look for the savings or money market account page. The APY should be clearly displayed. Some banks advertise a promotional rate for new customers that expires after a few months, so read the fine print. If you're comparing banks, write down the APY and the minimum balance required, then calculate what you'd earn on your actual balance at each one.
How APY changes when interest rates move
The Federal Reserve sets a target range for the federal funds rate, which is the rate banks charge each other to borrow overnight. Banks use this as a benchmark for the rates they offer customers. When the Fed raises its target rate, banks usually raise savings APY within one to three weeks. When the Fed cuts rates, banks often cut savings APY within days, sometimes within hours.
This asymmetry means you benefit when rates are rising—your APY climbs quickly—but lose out when rates are falling. If you locked money into a CD before rates dropped, you keep the higher rate for the full term. If you keep money in a regular savings account, your rate drops immediately when the Fed cuts.
The Federal Reserve meets eight times per year to decide on interest rates. You can check the Fed's website for upcoming meeting dates and past decisions. If you're trying to decide whether to move money into a CD or keep it in a savings account, knowing whether the Fed is likely to raise, cut, or hold rates helps you make that choice.
Why your bank's APY might be lower than advertised
The APY shown on a bank's website is the rate they're currently offering. If you opened an account six months ago at a higher rate, your account may still earn that older rate—or it may have automatically dropped to the current rate. Read your account agreement to see whether your rate is fixed or variable. Most savings accounts have variable rates that change when the bank changes them.
Some banks offer a promotional APY for new customers only, for a limited time. After the promotion ends, your rate drops to the standard rate. For example, a bank might offer 5.0% APY for the first three months, then 4.5% after that. Check the fine print before opening an account so you know when the promotional period ends.
If your current bank's APY has dropped significantly and you have a large balance, moving your money to a higher-paying bank can earn you hundreds of dollars more per year. The process usually takes three to five business days. You don't lose any interest during the transfer—interest accrues up to the day you withdraw, and the new bank starts paying interest the day the money arrives.
Interest earned on different account types
| Account Type | Typical APY Range | Minimum Balance | Withdrawal Rules |
|---|---|---|---|
| Online Savings Account | 4.0% to 5.3% | $0 to $25,000 | Unlimited withdrawals |
| Traditional Bank Savings | 0.01% to 0.5% | $0 to $10,000 | Unlimited withdrawals |
| Money Market Account | 4.25% to 5.4% | $2,500 to $25,000 | Limited withdrawals per month |
| 3-Month CD | 4.5% to 5.2% | $500 to $10,000 | Locked until maturity; early withdrawal penalty |
| 1-Year CD | 4.7% to 5.4% | $500 to $10,000 | Locked until maturity; early withdrawal penalty |
What happens to interest if you withdraw money early
If you withdraw money from a savings account or money market account, you stop earning interest on that amount immediately. The interest you've already earned stays in your account. For example, if you had $10,000 earning 4.5% APY and withdrew $5,000 after six months, you'd keep the roughly $225 in interest you earned, but the remaining $5,000 would earn interest going forward, not the original $10,000.
CDs have an early withdrawal penalty if you take your money out before the maturity date. The penalty is usually a certain number of months' worth of interest. A one-year CD with a three-month penalty means if you withdraw after six months, you lose three months of interest. Some banks charge a flat dollar amount instead. Always ask what the early withdrawal penalty is before you open a CD.
If you think you might need the money within a year, a savings account or money market account is safer than a CD because you can withdraw without penalty. The tradeoff is a slightly lower APY. If you're certain you won't need the money, a CD locks in a higher rate and protects you if the Fed cuts rates during that period.
Frequently Asked Questions
How often does interest get added to my account?
Most banks compound interest daily, meaning they calculate and add interest every single day. Some compound monthly or quarterly. Daily compounding pays slightly more over time, but the difference is usually small. Your bank's account agreement or website will say how often they compound.
Do I have to pay taxes on savings account interest?
Yes. Interest earned in a savings account is taxable income. Your bank will 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.
Can I lose money in a savings account?
No. Your principal (the money you deposited) is protected by FDIC insurance up to $250,000 per account at each bank. You earn interest on top of that, never lose it. The only way your balance goes down is if you withdraw money yourself.
What's the difference between APY and APR?
APY (annual percentage yield) includes the effect of compounding, so it's the true amount you earn per year. APR (annual percentage rate) does not include compounding. For savings accounts, APY is the number that matters. For loans, APR is what you'll usually see, but it also doesn't include compounding effects the way APY does.
Should I move my money to a higher-APY bank?
If your current bank's APY is more than 1% lower than what online banks are offering, moving your money could earn you hundreds of dollars more per year on a large balance. The transfer takes three to five business days and you don't lose any interest. If your balance is small (under $1,000), the difference in annual earnings is modest, so convenience might matter more than rate.