What you earn depends on the bank's rate and how much you have saved
A savings account earns interest based on two things: the annual percentage yield (APY) the bank offers and your account balance. If you have $1,000 in an account paying 4.50% APY, you earn roughly $45 per year—though the exact amount depends on how often the bank compounds interest (daily, monthly, or quarterly) and whether you add or withdraw money during the year.
The rate itself varies widely. As of early 2024, high-yield savings accounts at online banks pay between 4% and 5.35% APY, while traditional brick-and-mortar banks often pay 0.01% to 0.05%. The difference between these rates is enormous: $10,000 earning 0.01% yields $1 per year, while the same $10,000 at 5% yields $500 per year. Banks set their own rates based on what the Federal Reserve does, competition for deposits, and their own funding needs.
Interest compounds, meaning you earn interest on your interest. If compounding happens daily, your balance grows slightly each day, and the next day's interest is calculated on that larger amount. Over months and years, this compounds into real money—but only if you leave the money untouched and the rate stays the same.
Key Takeaways
- The amount you earn is your account balance multiplied by the APY, divided by 365 days (or 360, depending on the bank's method).
- High-yield savings accounts at online banks currently pay 4% to 5.35% APY, while traditional banks typically pay less than 0.1%.
- Interest compounds daily at most banks, meaning you earn interest on your interest, but only if you do not withdraw the money.
- Your rate can change at any time—banks lower rates when the Federal Reserve cuts rates, and raise them when the Fed raises rates.
- Money market accounts and certificates of deposit (CDs) may pay higher rates than savings accounts, but with different withdrawal rules.
How banks calculate what you earn each day
Banks use a simple formula: your balance multiplied by the APY, divided by the number of days in the year. If you have $5,000 and the APY is 4.5%, you earn roughly $5,000 × 0.045 ÷ 365 = $0.62 per day. That $0.62 is added to your account, and the next day's interest is calculated on $5,000.62.
The timing matters. If you deposit $10,000 on the 15th of the month, most banks start earning interest on that money immediately. If you withdraw $5,000 on the 20th, the interest for the 20th onward is calculated on the remaining $5,000. Some banks use the average daily balance method instead, which smooths out the ups and downs across the entire month—but the result is usually similar.
Interest posts to your account monthly, quarterly, or annually, depending on the bank. You see it as a deposit in your statement. Once it posts, it becomes part of your balance and earns interest itself going forward.
Why rates change and how to track yours
Banks adjust savings rates in response to Federal Reserve decisions. When the Fed raises its benchmark rate, banks compete to attract deposits and often raise their savings rates within days or weeks. When the Fed cuts rates, banks lower savings rates more slowly—sometimes weeks or months later—because they have less pressure to compete. This means the best time to lock in a high rate is right after the Fed raises rates.
Your bank can change your rate at any time, even on existing balances. They must notify you before the change takes effect, usually via email or a notice in your account. You are not locked in. If your bank drops its rate and you find a better one elsewhere, you can move your money to a different bank—there is no penalty for switching savings accounts.
Track your rate by logging into your online banking portal or calling your bank. Compare it to rates at other banks using sites that list current rates across multiple institutions. Rates change frequently, so what was competitive last month may not be now.
The difference between savings accounts, money market accounts, and CDs
A savings account lets you withdraw money anytime without penalty. A money market account works similarly but often pays a higher rate in exchange for requiring a larger minimum balance (sometimes $2,500 or more). A certificate of deposit (CD) locks your money away for a set term—3 months, 6 months, 1 year, 5 years—and pays a higher rate because you cannot touch the money without a penalty.
If you withdraw from a CD before the term ends, the bank charges an early withdrawal penalty, usually equal to a few months of interest. A 1-year CD paying 5% with a 3-month penalty means if you withdraw after 6 months, you lose $12.50 in interest (3 months × $1,000 × 5% ÷ 12). You still get your principal back, but the penalty reduces your earnings.
For money you need to access, a high-yield savings account is usually the best choice. For money you will not touch for a year or more, a CD often pays more. Money market accounts sit in the middle—higher rates than savings, but still liquid if you need the cash.
How inflation affects what your interest actually buys
Interest earnings are real money, but inflation erodes their purchasing power. If you earn 4.5% on your savings but inflation is running at 3%, your money is only growing in real terms by about 1.5%. If inflation is 5% and you earn 4.5%, you are actually losing purchasing power—your money buys less next year than it does today, even though the account balance went up.
This is why the rate matters. A 0.01% savings account at a traditional bank loses money to inflation almost every year. A 4.5% high-yield account keeps pace with inflation in most years and actually builds wealth. Over 10 years, the difference between these two rates is thousands of dollars on a modest balance.
What happens to interest if you close your account
Interest accrues up to the day you close the account. If you close on the 15th of the month, you earn interest through the 15th, and that interest is paid out when you close. You do not lose accrued interest by leaving the bank—you just stop earning it after the account closes.
Some banks pay interest monthly, so if you close mid-month, you may not see that month's interest until the regular posting date. Check with your bank about their specific timeline. If you are moving money to another bank, ask the new bank when they start paying interest on your deposit—most start the day the money arrives, but some wait until the next business day or the next interest posting cycle.
Frequently Asked Questions
Can I earn interest on money I withdraw before the month ends?
Yes. Interest accrues daily, so you earn interest on every dollar for every day it sits in the account. If you deposit $5,000 on the 1st and withdraw $3,000 on the 15th, you earn interest on $5,000 for 14 days and $2,000 for the remaining days of the month. The interest posts at the end of the month.
What is the difference between APY and APR for savings accounts?
APY (annual percentage yield) includes the effect of compounding, while APR (annual percentage rate) does not. For savings accounts, banks advertise APY because it shows the true amount you earn. APR is used for loans and credit cards. Always compare APY to APY when shopping for savings rates.
Do I pay taxes on savings account interest?
Yes. Interest is taxable 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. High-yield savings accounts that pay $500+ per year in interest can create a meaningful tax bill.
Will my rate stay the same if I do not touch my account?
No. Banks can change rates anytime, even on existing balances. You are not locked in unless you have a CD. Your bank must notify you before the change, but you cannot prevent it. If rates drop, you can move your money to a bank with a better rate.
How much interest do I need to earn before the bank reports it?
Banks report interest of $10 or more per year on a 1099-INT form. Interest below $10 is still taxable income, but the bank does not send a form. You are responsible for reporting it if you owe taxes.