The amount you earn depends on the account's APY, how much you deposit, and how long the money sits there
Interest on a savings account is calculated by multiplying your balance by the annual percentage yield (APY), then dividing by 365 days. If you have $10,000 in an account with a 4.5% APY, you earn roughly $450 per year—or about $1.23 per day. But the real number depends on whether interest compounds daily, monthly, or annually, and whether your balance changes during the year.
Most online banks compound interest daily, meaning you earn interest on your interest. A traditional bank might compound monthly or quarterly, which earns you slightly less. The difference is small on modest balances but grows with larger amounts and higher rates.
Your actual earnings also depend on how long money stays in the account. If you deposit $10,000 for six months at 4.5% APY, you earn roughly $225, not $450. If you make regular deposits—say $500 per month—each deposit earns interest for a different length of time, so the total is harder to predict without a calculator.
Key Takeaways
- Interest earned equals your balance multiplied by the APY, divided by the number of days in a year, then multiplied by the number of days your money was in the account.
- Daily compounding earns more than monthly or quarterly compounding because you earn interest on interest more frequently.
- The APY advertised by the bank already includes the effect of compounding, so you do not need to calculate it separately.
- Withdrawals reduce your balance and therefore reduce the interest you earn for the rest of the year.
- High-yield savings accounts at online banks typically offer 4% to 5% APY, while traditional banks often offer less than 1%.
How the calculation actually works
Banks use this formula: Interest = Balance × APY ÷ 365 × Days in Account. If you deposit $5,000 on January 1 in an account with 4.5% APY and leave it untouched for the full year, you earn $5,000 × 0.045 ÷ 365 × 365 = $225. If you withdraw $2,000 on July 1, the second half of the year earns interest only on $3,000, so your total is roughly $112.50 for the first half plus $67.50 for the second half, totaling $180.
The APY shown by the bank already accounts for compounding. You do not multiply or adjust it yourself. If a bank advertises 4.5% APY with daily compounding, that 4.5% is the final number—the rate that includes the benefit of earning interest on interest every single day.
Some banks show both the APR (annual percentage rate) and the APY. The APR is the raw rate before compounding; the APY is what you actually earn. For savings accounts, always use the APY when comparing banks.
Why different banks pay different amounts
Online banks typically offer higher APY than brick-and-mortar banks because they have lower overhead costs. An online bank with no physical branches might offer 4.5% APY, while a traditional bank down the street offers 0.01%. On $10,000, that difference is $450 per year versus $1 per year.
APY also changes when the Federal Reserve raises or lowers interest rates. When the Fed increases rates, banks raise their savings APY within days or weeks. When the Fed cuts rates, banks lower APY more slowly. If you lock in a high rate today, that rate is not may provide forever—it can drop when the Fed moves.
Money market accounts and certificates of deposit (CDs) sometimes pay more than savings accounts. A CD with a one-year term might pay 5% APY, while a savings account pays 4.5%. The trade-off is that you cannot withdraw from a CD without a penalty.
What happens when you make regular deposits
If you deposit money monthly, each deposit earns interest for a different number of days. Your first $500 deposit earns interest for 12 months; your second earns for 11 months; your third earns for 10 months, and so on. The total interest is the sum of all these smaller calculations.
A rough estimate: if you deposit $500 monthly into an account with 4.5% APY, you earn roughly $135 to $150 in interest over the year. The exact number depends on the day of the month you deposit and whether the bank compounds daily or monthly. Most online banks provide an interest calculator on their website where you can enter your deposit schedule and get a precise figure.
How taxes affect your earnings
Interest earned in a savings account is taxable income. If you earn $450 in interest, you must report it on your tax return. The bank will send you a 1099-INT form in January if you earned $10 or more in interest during the year.
Your tax bracket determines how much of that interest you keep. If you are in the 22% federal tax bracket, $450 in interest costs you roughly $99 in federal taxes, leaving you $351. State income tax may apply on top of that, depending on where you live.
This is why the real return on a savings account is lower than the APY suggests. A 4.5% APY might net you only 3.5% after taxes, depending on your situation.
Comparing accounts side by side
| Account Type | Typical APY Range | Interest on $10,000 per Year (before taxes) | Compounding |
|---|---|---|---|
| Online savings account | 4% to 5% | $400 to $500 | Daily |
| Traditional bank savings | 0.01% to 0.5% | $1 to $50 | Monthly or quarterly |
| Money market account | 4% to 5% | $400 to $500 | Daily |
| 1-year CD | 4.5% to 5.5% | $450 to $550 | Daily |
The difference between a traditional bank and an online bank is dramatic. On $10,000, you earn $1 per year at a traditional bank versus $450 at an online bank. Over 10 years, that is $10 versus $4,500—a gap of $4,490.
When interest rates are falling
If you have money in a savings account and the Federal Reserve cuts rates, your APY will drop. Banks lower rates on savings accounts within weeks of a Fed cut, sometimes faster. If you were earning 5% APY and rates fall, you might drop to 4.5% or lower.
CDs protect you from this because the rate is locked in for the term. If you open a one-year CD at 5% APY, you earn 5% for the full year even if rates fall to 2%. The downside is you cannot access the money without paying an early withdrawal penalty, usually three to six months of interest.
If you think rates will fall, locking in a CD now protects your rate. If you think rates will rise, keeping money in a savings account lets you benefit from higher rates when they come.
Frequently Asked Questions
Do I earn interest on interest in a savings account?
Yes, if the bank compounds daily. Each day, the bank calculates interest on your balance plus any interest you have already earned. Monthly or quarterly compounding does the same thing less frequently. The APY already includes this effect, so you do not need to calculate it separately.
What if I withdraw money partway through the year?
You earn interest only on the balance for the days it was in the account. If you deposit $10,000 on January 1 and withdraw $5,000 on July 1, you earn interest on $10,000 for six months, then $5,000 for six months. Your total interest is lower than if you had left the full amount in.
Is the APY may provide to stay the same?
No. Banks can raise or lower the APY at any time. When the Federal Reserve changes rates, banks usually adjust savings APY within days or weeks. CDs lock in a rate for the term, but savings accounts do not.
How much interest do I need to earn before the bank reports it to the IRS?
Banks send a 1099-INT form if you earn $10 or more in interest during the year. You must report all interest income on your tax return, even if you earn less than $10, but the bank does not send a form for amounts under $10.
Should I move my money to a high-yield account?
If your current bank pays less than 1% APY and online banks are offering 4% or higher, moving your money could earn you hundreds of dollars per year with no additional effort or risk. The transfer usually takes three to five business days.