What you earn depends on the bank's rate and how much you have saved

The amount of interest a savings account earns is set by the bank and changes based on what the Federal Reserve does with interest rates. Right now, savings accounts at online banks typically pay between 4% and 5.35% annual percentage yield (APY), while brick-and-mortar banks often pay 0.01% to 0.05%. The difference is real money: on $10,000, you'd earn roughly $400 to $535 per year at an online bank versus $1 to $5 at a traditional bank.

Your bank can change its rate at any time, and most do when the Fed raises or lowers its benchmark rate. You don't negotiate the rate—it's the same for everyone with that account type at that bank. The interest compounds, usually daily or monthly, which means you earn interest on your interest. A higher APY compounds faster, but the base rate is what matters most.

Key Takeaways

  • Online banks currently offer 4% to 5.35% APY on savings accounts, while traditional banks typically offer 0.01% to 0.05%.
  • Your bank sets the rate and can change it without notice, though rate cuts usually happen when the Fed lowers rates.
  • Interest compounds daily or monthly at most banks, meaning you earn returns on money you've already earned.
  • The actual dollars you earn depend on your balance and how long the money stays in the account.

How the Federal Reserve's rate affects what your bank pays

The Federal Reserve sets a target range for the federal funds rate, which is the interest rate banks charge each other for overnight loans. When the Fed raises this rate, banks have more incentive to offer higher APYs on savings accounts to attract deposits. When the Fed cuts rates, banks lower their savings rates too—sometimes within days.

The relationship is not one-to-one. A bank might raise its savings rate by 0.25% when the Fed raises rates by 0.25%, or it might raise by less. Online banks tend to pass along rate changes faster than traditional banks because they have lower overhead and compete directly on rate. If your bank's rate hasn't moved in months but the Fed has raised rates, you're losing money to inflation and should compare rates at other banks.

How to calculate what you'll earn

The formula is simple: multiply your balance by the APY, then divide by 12 for a monthly estimate. If you have $5,000 in an account paying 5% APY, you earn roughly $250 per year, or about $21 per month. If you have $50,000, you earn $2,500 per year, or about $208 per month.

This assumes your balance stays the same all year. If you add money regularly, you earn interest on the new deposits too, but only from the day they're deposited. If you withdraw money, you stop earning interest on that amount. Most banks calculate interest daily, so the exact amount varies slightly based on when deposits and withdrawals happen and how many days are in each month.

Why online banks pay more than traditional banks

Online banks have no physical branches, no tellers, and no real estate costs. They pass those savings to customers through higher rates. They also compete directly on rate because they can't offer the convenience of walking into a branch. A traditional bank might pay 0.05% because customers value the branch network and will keep money there anyway.

This doesn't mean online banks are riskier. Most are FDIC-insured just like traditional banks, meaning your deposits up to $250,000 are protected if the bank fails. The trade-off is that you can't deposit cash in person or talk to someone face-to-face, though most online banks let you deposit checks by phone or mail.

How interest compounds and why it matters over time

Compounding means the bank pays interest on your interest. If your account compounds daily at 5% APY, the bank divides the annual rate by 365, calculates interest for that day, and adds it to your balance. Tomorrow, you earn interest on that new, slightly larger balance. Over a year, daily compounding earns you slightly more than if interest were paid once at the end of the year.

The difference is small on savings accounts—usually less than 0.1% more per year—but it adds up over decades. On $100,000 at 5% APY with daily compounding, you'd earn about $5,127 in the first year instead of $5,000. After 10 years, the gap widens. Most banks compound daily or monthly; a few compound quarterly or annually. Check your account terms to see which yours does.

What happens when rates fall

When the Fed cuts rates, banks lower their savings rates within days or weeks. An account paying 5.35% might drop to 4.5%, then to 3.75% as the Fed continues cutting. Your existing balance doesn't disappear—you just earn less on it going forward. If you want to protect your rate, some banks offer promotional rates that are locked in for a set period, usually 3 to 12 months, though these are rare.

The best strategy during falling rates is to lock in a high rate before it drops. If you have money you won't need for a year or more, a certificate of deposit (CD) locks in a fixed rate for a specific term. If you need access to your money, a high-yield savings account lets you move it if rates drop elsewhere, though you'll earn less than a CD for the same period.

Comparing rates across banks to find the best deal

Savings account rates change constantly, so comparing banks once isn't enough. Use a rate aggregator like Bankrate, DepositAccounts, or your bank's own website to see current rates. Look for the APY, not just the interest rate—APY includes the effect of compounding and is the true annual return. Check whether the rate applies to all balances or only balances above a certain amount.

Some banks offer higher rates for new customers only, then drop the rate after a few months. Read the terms carefully. If a bank's rate is significantly higher than competitors, make sure it's FDIC-insured and that you understand any conditions. Moving money between banks is free and takes 3 to 5 business days via ACH transfer, so switching to a higher-paying bank makes financial sense if the difference is more than 0.5% APY.

Frequently Asked Questions

Do I 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 if you earn $10 or more in interest during the year. You report this on your tax return. The tax rate depends on your overall income and tax bracket.

Can a bank lower my rate without telling me?

Yes. Banks can change savings rates at any time without advance notice. However, they must disclose the new rate before it takes effect, usually by email or in your online account. Check your account regularly or set up rate alerts at comparison sites to catch drops.

What's the difference between APY and interest rate?

Interest rate is the annual percentage the bank pays on your balance. APY includes the effect of compounding, so it's always equal to or higher than the stated interest rate. Always compare APY, not the interest rate, because APY shows what you'll actually earn.

Is my money safe in a high-yield savings account?

Yes, if the bank is FDIC-insured. The FDIC protects up to $250,000 per depositor per bank, regardless of the interest rate. Online banks and traditional banks have the same FDIC protection. Check your bank's FDIC status on the FDIC website before opening an account.

How often does interest get added to my account?

Most banks compound and credit interest daily, meaning they calculate it every day but may credit it monthly or quarterly. Check your account terms to see when interest actually appears in your balance. Some banks credit monthly, others quarterly. The difference in what you earn is small.