Yes, savings accounts make you money through interest, but the amount depends on the rate your bank offers and how much you keep in the account

A savings account earns money when a bank pays you interest on the balance you deposit. The bank uses your money to lend to other customers and invests it; in return, they share a portion of what they earn with you. The more money you keep in the account and the higher the interest rate, the more you earn. However, the interest rates on savings accounts are typically low—often less than 1% per year at traditional banks, though some online banks offer rates between 4% and 5% as of 2024.

The interest you earn is added to your account automatically on a schedule set by your bank, usually monthly or daily. Over time, if you do not withdraw the money, you can earn interest on your interest—called compound interest. This means your balance grows faster the longer you leave it untouched. A $10,000 deposit earning 4.5% annually will grow to roughly $10,450 after one year, then $10,920 after two years, assuming no withdrawals.

Key Takeaways

  • Banks pay you interest on savings account balances, but rates vary widely—traditional banks often pay less than 1%, while online banks may offer 4% to 5% or higher.
  • The interest you earn depends on three things: the account balance, the interest rate, and how long the money stays in the account.
  • Interest compounds, meaning you earn interest on your interest, so your money grows faster the longer you leave it untouched.
  • Inflation can reduce the real value of your savings, so a 0.5% interest rate in a high-inflation year means you are actually losing purchasing power.
  • High-yield savings accounts at online banks typically pay more interest than traditional brick-and-mortar banks, but both are insured by the FDIC up to $250,000.

How interest rates are set and why they change

Your bank decides what interest rate to offer based on the federal funds rate—the rate the Federal Reserve sets for banks to lend to each other. When the Fed raises its rate, banks typically raise the rates they offer on savings accounts. When the Fed lowers its rate, savings account rates usually fall too. Banks also consider how much competition they face: online banks with lower overhead costs often offer higher rates to attract deposits.

Interest rates change over time and vary between banks. A rate of 4.5% today might drop to 3.5% in six months if the Fed cuts rates, or it might stay the same if your bank wants to keep customers. Some banks offer a promotional rate for a limited time to new customers, then drop the rate after a few months. Always check your account statement or log into your online banking to see your current rate, because it is not fixed for the life of your account.

The difference between simple and compound interest

Simple interest means the bank pays you interest only on the original amount you deposited. If you put $5,000 in an account earning 2% simple interest per year, you earn $100 the first year, $100 the second year, and $100 every year after—always $100, because the calculation is always based on the original $5,000.

Compound interest means the bank pays you interest on your balance, including the interest you have already earned. With the same $5,000 at 2% compounded annually, you earn $100 in year one (bringing your balance to $5,100), then $102 in year two (2% of $5,100), then $104.04 in year three, and so on. The more often interest compounds—daily, weekly, or monthly—the faster your money grows. Most savings accounts compound daily, which is why the difference between simple and compound interest matters over time.

After 10 years, $5,000 earning 2% simple interest grows to $5,500. The same $5,000 earning 2% compounded daily grows to roughly $6,105. That extra $605 came from earning interest on your interest.

How to compare interest rates across banks

The number to look for is the Annual Percentage Yield (APY), not just the interest rate. APY includes the effect of compounding and tells you the true amount you will earn in a year. Two banks might advertise different rates, but the one with daily compounding and a slightly lower stated rate might actually give you more money because of how often interest is added.

You can compare APYs across banks using financial websites like Bankrate, DepositAccounts, or NerdWallet, which list current rates at hundreds of banks. Call your current bank and ask what rate they are offering on new deposits, then compare it to what online banks are offering. The difference between a 0.5% APY and a 4.5% APY on a $10,000 balance is $400 per year—real money that adds up if you keep the account open for several years.

Keep in mind that higher rates sometimes come with conditions: a minimum deposit requirement, a limit on how many withdrawals you can make per month, or a requirement to set up direct deposit. Read the account terms before opening an account so you know what you are signing up for.

When inflation reduces what your savings are actually worth

Interest makes your account balance grow, but inflation—the rising cost of goods and services—can reduce what that money can actually buy. If inflation is 3% per year and your savings account earns 0.5% interest, your money is losing 2.5% of its purchasing power each year. A dollar in your account today buys less next year, even though the account balance went up.

This matters most when you are saving for something specific, like a car or a house down payment. If you save $20,000 for a car that costs $25,000 today, and inflation is 4% per year while your savings account earns 0.5%, you will have less buying power in two years even though your account balance grew slightly. High-yield savings accounts with rates of 4% to 5% can keep pace with or beat inflation in most years, which is why they are better for money you plan to use soon.

FDIC insurance protects your money up to $250,000

All money in a savings account at a bank insured by the Federal Deposit Insurance Corporation (FDIC) is protected up to $250,000 per depositor, per bank. This means if the bank fails, you will not lose your money or the interest you have earned. Online banks and traditional banks are both FDIC-insured as long as they display the FDIC logo or state they are members.

If you have more than $250,000 to save, you can open accounts at multiple banks to keep all your money insured. Each bank account is covered separately, so $250,000 at Bank A and $250,000 at Bank B are both fully protected. Some banks also offer separate coverage for joint accounts and retirement accounts, so check the FDIC website if you have questions about your specific situation.

Frequently Asked Questions

How much money do I need to start earning interest?

Most banks begin paying interest on any balance, even $1, though some require a minimum deposit to open the account—often $25 to $500. Once the account is open, interest accrues on whatever you have in it. Check your bank's terms to see if there is a minimum balance requirement to earn the advertised rate.

Can I lose money in a savings account?

You cannot lose the principal amount you deposit because FDIC insurance protects it. However, if inflation is higher than your interest rate, the real value of your money decreases—it buys less over time. Your account balance grows, but your purchasing power shrinks.

Is a savings account better than keeping money under a mattress?

Yes. A savings account earns interest, so your money grows automatically. Even at 0.5% interest, $10,000 becomes $10,050 in a year with no effort. Under a mattress, it stays $10,000 while inflation makes it worth less. A high-yield savings account earning 4% to 5% makes the difference much larger.

Why do online banks pay more interest than traditional banks?

Online banks have lower costs because they do not maintain physical branches or employ as many staff. They pass those savings to customers by offering higher interest rates to attract deposits. Traditional banks have higher overhead, so they offer lower rates but may provide in-person service and more branch locations.

What happens to my interest if I withdraw money before the end of the year?

You keep all the interest you have earned up to the date of withdrawal. Interest is calculated daily and added to your account regularly, so you earn a proportional amount based on how long the money was in the account. There is no penalty for withdrawing early from a standard savings account.