What your savings account earns depends on the interest rate, how much you have in it, and how long the money sits there

A savings account earns money through interest—a percentage of your balance that the bank pays you for letting them use your money. The amount you earn is not fixed. It changes based on three things: the interest rate the bank offers, your account balance, and how long your money stays in the account.

If you have $1,000 in an account earning 4.5% annual interest, you will earn about $45 per year. If you have $10,000 at the same rate, you will earn about $450 per year. The math is straightforward, but the rates themselves shift constantly—sometimes weekly—based on what the Federal Reserve does and what banks decide to offer.

Most traditional brick-and-mortar banks offer rates between 0.01% and 0.5%. Online banks and credit unions often offer higher rates, sometimes 4% to 5% or more. The difference between a 0.01% rate and a 5% rate on $10,000 is roughly $500 per year versus $50 per year. That gap matters.

Key Takeaways

  • Your earnings equal your balance multiplied by the annual interest rate, divided by 12 if you want the monthly amount.
  • Interest rates vary widely by bank and change frequently, so the rate you see today may not be the rate you get tomorrow.
  • Online banks typically pay higher rates than traditional banks, sometimes 10 times as much on the same balance.
  • Interest compounds monthly or daily depending on the account, meaning you earn money on the interest you already earned.

How the math works: calculating what you will earn

The basic formula is simple: Annual Interest = Balance × Annual Interest Rate. If you have $5,000 and the rate is 4%, you earn $200 per year. Divide by 12 to get the monthly amount: roughly $16.67 per month.

Most banks compound interest daily or monthly, which means you earn interest on your interest. If your account compounds daily, the bank calculates what you owe each day, adds it to your balance, and then calculates the next day's interest on the new, slightly larger balance. Over a year, this compounds into a slightly higher total than simple multiplication would suggest—but the difference is usually small unless your rate is very high or your balance is very large.

To see what you will actually earn, do not rely on mental math. Use the bank's interest calculator on their website, or ask them directly. Most will tell you the exact amount you will earn on a specific balance over a specific time period.

Why interest rates vary so much between banks

Traditional banks—the ones with physical branches—typically offer lower rates because they have higher costs. They pay for buildings, staff, and customer service. Online banks have almost no physical overhead, so they pass the savings to customers in the form of higher rates.

Credit unions often pay higher rates than traditional banks too, especially if you are a member. They are nonprofit organizations, so they return earnings to members rather than shareholders.

The Federal Reserve also influences rates. When the Fed raises its benchmark rate, banks tend to raise savings rates. When the Fed cuts rates, banks cut savings rates. This happens with a lag—sometimes weeks or months—so the rate you see today reflects decisions made in the past.

How to find the current rates banks are offering

Interest rates change frequently, and there is no single place where all banks post their current rates. You have to check individual banks' websites or use comparison sites like Bankrate, DepositAccounts, or NerdWallet, which track rates across hundreds of institutions.

When you compare, look for the Annual Percentage Yield (APY), not just the interest rate. APY includes the effect of compounding, so it is the true number you will earn. A bank might advertise a 4.5% rate, but if it compounds daily, the APY might be 4.59%.

Also check whether the rate is may provide or promotional. Some banks offer a high rate for the first few months, then drop it sharply. Read the fine print to see when the rate changes and what it changes to.

What happens to your earnings over time

The longer your money sits in the account, the more you earn—assuming the rate stays the same. $10,000 at 4% earns $400 per year, $800 over two years, $1,200 over three years, and so on. If you add money regularly, your earnings grow faster because you are earning interest on a larger balance.

If you deposit $500 per month into an account earning 4% APY, your total earnings after one year will be higher than if you deposited the full $6,000 at the start, because the early deposits have more time to earn interest. The difference is not huge—maybe $60 to $100 over a year—but it adds up.

If the interest rate drops, your earnings drop too. If your bank cuts the rate from 4% to 2%, your annual earnings on $10,000 fall from $400 to $200. You do not lose money, but you earn less going forward.

The difference between savings accounts and other places to put money

Savings accounts are safe and liquid—you can withdraw your money anytime without penalty. But they earn less than other options. Money market accounts sometimes pay slightly higher rates. Certificates of Deposit (CDs) usually pay more, but you have to lock your money away for a set period—three months, one year, five years—and you pay a penalty if you withdraw early.

High-yield savings accounts are a middle ground: they pay rates similar to or higher than regular savings accounts, but your money stays liquid. The tradeoff is that they are usually only available online, and you cannot visit a branch in person.

If you need the money within a year or two, a savings account or high-yield savings account makes sense. If you know you will not touch the money for several years, a CD might earn you more.

Frequently Asked Questions

Do I pay taxes on the interest I earn?

Yes. Interest income is taxable as ordinary 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 tax rate depends on your overall income and tax bracket.

Can the bank lower my interest rate without warning?

Yes. Banks can change rates on savings accounts at any time, usually with little or no notice. Some accounts have a may provide rate for a set period, but most do not. If your rate drops and you want a higher rate, you can move your money to another bank.

What is the difference between APR and APY?

APR is the annual percentage rate without compounding. APY is the annual percentage yield and includes the effect of compounding. APY is always equal to or higher than APR. When comparing accounts, use APY to see what you will actually earn.

If I have $100,000, how much will I earn in a year?

At 4% APY, you would earn $4,000 per year. At 0.5%, you would earn $500 per year. The difference is $3,500, which is why shopping for a higher rate matters more when you have a large balance.

Does moving my money between banks affect my earnings?

No. Moving money does not affect how much interest you earn. You earn interest based on your balance and the rate, regardless of which bank holds the account. The only thing that matters is when the transfer completes—you start earning the new rate once the money lands in the new account.