Your interest depends on the bank's rate, how much you keep in the account, and how often interest compounds

The amount you earn in interest is not fixed—it changes based on three things the bank controls and one thing you control. The bank sets the annual percentage yield (APY), which is the rate it pays you. The bank also decides how often it compounds interest (daily, monthly, or quarterly). You control the balance you keep in the account. A $1,000 balance at 4.5% APY earns roughly $45 per year if interest compounds daily. The same $1,000 at 0.01% APY earns about 10 cents per year. The difference between banks can be hundreds of dollars on the same balance.

Interest rates change constantly. Banks raise and lower their APY based on what the Federal Reserve does with its benchmark rate. When the Fed raises rates, banks usually raise savings rates within days or weeks. When the Fed cuts rates, banks cut savings rates just as quickly. This means the rate you see today may not be the rate you earn six months from now.

Key Takeaways

  • The APY posted by the bank is the rate you earn per year, assuming your balance stays the same and you do not withdraw money.
  • Interest compounds at different intervals—daily compounding earns slightly more than monthly or quarterly on the same APY.
  • A $10,000 balance at 4.5% APY earns about $450 per year; at 0.5% APY it earns about $50 per year.
  • Banks change their rates frequently, so the APY you see when you open an account may be different three months later.
  • Online banks typically offer higher APY than brick-and-mortar banks because they have lower overhead costs.

How to calculate what you will earn

The basic formula is: Balance × APY ÷ 365 × number of days. If you have $5,000 in an account paying 4.0% APY and you leave it untouched for one year, you earn $200. If you leave it for six months (roughly 180 days), you earn about $100. If you add $500 to the account halfway through the year, only that extra $500 earns interest for the remaining six months, which adds about $10 more.

Most banks show you the projected interest in your online dashboard or statement. You can also use a savings calculator on the bank's website—enter your balance, the APY, and how long you plan to keep the money, and it shows you the total interest. These calculators assume the rate stays the same and you do not add or withdraw money, so the real number may differ slightly.

Compounding matters more the longer you leave money in the account. Daily compounding means the bank adds a tiny bit of interest each day, and the next day's interest is calculated on the new, slightly higher balance. Over a year, daily compounding on a $10,000 balance at 4.5% APY earns about $460, while monthly compounding earns about $459. The difference is small on short timescales but grows over years.

Why rates vary so much between banks

A brick-and-mortar bank with hundreds of branches pays for rent, staff, and physical infrastructure. An online-only bank has no branches and lower costs, so it can pay you more interest on the same deposit. In 2024, online banks often offered 4.0% to 5.0% APY on savings accounts, while traditional banks offered 0.01% to 0.5%. The difference on a $50,000 balance is roughly $2,000 to $2,500 per year.

Banks also compete for deposits. When one bank raises its rate to attract customers, others follow within weeks. When deposits are plentiful and the Fed signals it may cut rates, banks lower their rates preemptively. You do not have to stay with a bank that drops its rate—you can move your money to a higher-paying account at another bank without penalty.

What happens to your interest if you withdraw money

Interest is calculated on your average daily balance or your ending balance, depending on the bank's method. If you withdraw money partway through the month, you earn interest only on the balance you actually held. If you have $10,000 on the first day of the month and withdraw $5,000 on the 15th, the bank calculates interest on roughly $7,500 for that month (the average of $10,000 and $5,000), not the full $10,000.

Some banks use the "low balance" method, which is less common and less favorable to you—they pay interest based on your lowest balance during the period, even if you only dipped that low for one day. Check your account agreement to see which method your bank uses. Most online banks use average daily balance, which is fairer.

How inflation affects what your interest is actually worth

Interest earnings are real money, but inflation reduces their purchasing power. If you earn 4.5% APY but inflation is 3.5%, your real return is only about 1%. This means your money grows, but it does not buy as much as it would have a year ago. High-yield savings accounts have kept pace with inflation in recent years, but traditional bank savings accounts almost never do.

This is why the difference between a 4.5% account and a 0.5% account matters. Over five years, $50,000 at 4.5% grows to about $62,500. The same $50,000 at 0.5% grows to only about $51,300. The difference is $11,200—real money that could have covered an emergency or a down payment.

Taxes on savings account interest

Interest you earn is taxable income. The bank sends you a 1099-INT form at the end of the year if you earned $10 or more in interest (the threshold varies by bank). You report this on your tax return as ordinary income, which means it is taxed at your regular income tax rate, not a lower capital gains rate.

If you earn $500 in interest and you are in the 22% tax bracket, you owe about $110 in federal tax on that interest. This reduces your real earnings. High-yield savings accounts still come out ahead because the interest is so much higher that even after taxes, you earn more than you would at a traditional bank.

Comparing rates across banks

Use a rate comparison site to see what different banks are offering. Sites like Bankrate, DepositAccounts, and HighYieldSavings.com update rates daily and let you filter by APY, bank type, and account features. Read the fine print—some banks offer a promotional rate for the first few months, then drop the rate significantly. Others offer the same rate to all customers indefinitely.

When you find a bank with a rate you like, check whether it has any account minimums, monthly fees, or withdrawal limits. Some high-yield savings accounts require a $25,000 minimum balance to earn the advertised rate. Others have no minimum but charge a monthly fee if your balance falls below a certain level. These details affect your real earnings.

Frequently Asked Questions

Does my interest rate stay the same forever?

No. Banks change rates frequently, usually within days of a Federal Reserve decision. Your rate may go up or down depending on market conditions. Some banks lock in a rate for a promotional period, but standard savings accounts have variable rates that can change anytime.

What is the difference between APY and APR?

APY includes the effect of compounding—it shows what you actually earn over a year. APR does not include compounding and is used mainly for loans and credit cards. For savings accounts, always look at the APY, not the APR.

Can I lose money in a savings account?

No, as long as the bank is FDIC-insured. Your principal is protected up to $250,000 per depositor per bank. You cannot lose your deposit, but inflation can reduce its purchasing power if the interest rate is lower than inflation.

Do I have to pay taxes on interest I earn?

Yes, interest is taxable income. If you earn $10 or more, the bank reports it on a 1099-INT form and you report it on your tax return. The tax is owed at your regular income tax rate.

Is it worth moving my money to a higher-rate bank?

It depends on the difference in rates and your balance. If you have $50,000 and can move from 0.5% to 4.5%, you earn an extra $2,000 per year. The move takes a few days and costs nothing, so it is usually worth it. For smaller balances under $5,000, the difference is smaller but still real.