What determines how much interest you earn

The amount of interest you earn on a savings account depends on three things: the annual percentage yield (APY) the bank offers, how much money you have in the account, and how long it stays there. A bank with a 4.5% APY will pay you more than one offering 0.01% APY on the same balance. The difference between these two is real money—on $10,000, that gap is roughly $450 per year.

Banks set their own APY rates based on what the Federal Reserve charges them to borrow money. When the Fed raises its rates, banks typically raise savings APY within weeks. When the Fed cuts rates, banks often drop savings APY much faster than they raise it. This means the rate you see today may not be the rate you earn six months from now.

Interest compounds, usually daily or monthly depending on the bank. Compounding means you earn interest on your interest—the bank calculates what you owe, adds it to your balance, then calculates interest on that larger amount next time. Daily compounding earns slightly more than monthly compounding, but the difference is small unless your balance is very large.

Key Takeaways

  • The APY rate varies by bank and changes when the Federal Reserve adjusts its rates, so comparing rates across banks can mean hundreds of dollars per year on the same balance.
  • Online banks typically offer higher APY than brick-and-mortar banks because they have lower overhead costs.
  • Interest compounds daily or monthly, meaning you earn interest on the interest the bank has already paid you.
  • Your actual earnings depend on your balance and how long the money stays in the account—moving money out stops the interest clock.

How to calculate what you will earn

The formula is straightforward: multiply your balance by the APY, then divide by 365 (or 360, depending on the bank). That gives you the interest earned per day. On $5,000 at 4.5% APY, you earn roughly $0.62 per day, or about $19 per month if the balance stays constant.

Most banks show you the interest earned in your account statement or online dashboard. You do not have to calculate it yourself. But knowing the math helps you compare banks quickly. A $10,000 balance at 4.5% APY earns about $450 per year. At 0.5% APY, the same balance earns about $50 per year. That $400 difference is real money you keep or lose based on which bank you choose.

If your balance changes during the month—you deposit $2,000 or withdraw $1,500—the bank recalculates. Most banks use the daily balance method, meaning they track your balance every single day and calculate interest on each day's amount separately. A few use the average daily balance method, which smooths out the ups and downs. The difference is usually a few dollars per month.

Why online banks pay more than traditional banks

Online banks offer higher APY because they do not maintain physical branches, employ tellers, or pay for office space. Those savings get passed to you as higher interest rates. A traditional bank might offer 0.01% APY while an online bank offers 4.5% APY on the same type of account. Both are FDIC-insured up to $250,000, so the safety is identical.

Credit unions sometimes offer competitive rates too, though they vary widely. Some credit unions pay 4% or higher on savings; others pay less than 1%. Rates depend on the union's size, location, and how much money they have to lend out. You have to be a member to open an account, which usually means living or working in a specific area or belonging to a particular employer or organization.

Money market accounts and high-yield savings accounts are different products, but they work the same way: the bank pays you interest on your balance. Money market accounts may come with a debit card or checkbook, while high-yield savings accounts are usually for saving only. The APY is what matters—the account type is secondary.

What happens to your interest if you withdraw money

Interest stops accruing the moment you withdraw the money. If you have $5,000 earning 4.5% APY and you withdraw $2,000 on the 15th of the month, the bank calculates interest only on the $5,000 for the first half of the month and on the $3,000 for the second half. You lose the interest you would have earned on that $2,000 for the rest of the month.

Some savings accounts have no withdrawal limits, so you can move money in and out freely. Others limit you to six withdrawals per month or charge a fee if you exceed that limit. Federal rules used to cap withdrawals at six per month, but that rule was suspended in 2020 and has not been reinstated. Banks can still set their own limits, so check your account terms before opening.

If you need the money soon, a high-yield savings account still beats keeping cash in a checking account, which earns little to no interest. But if you know you will not need the money for six months or longer, a certificate of deposit (CD) might pay more. CDs lock your money away for a set time—three months, one year, five years—and pay a higher rate in exchange for that commitment.

How interest rates change over time

Banks adjust their savings APY regularly, sometimes weekly. When the Federal Reserve raises its benchmark rate, banks usually raise savings APY within a few weeks. When the Fed cuts rates, banks often cut savings APY much faster—sometimes within days. This asymmetry means you benefit quickly when rates rise but lose ground quickly when they fall.

The rate you earn today is not may provide to stay the same. Your bank can lower it at any time, though they must give you notice (usually 30 days). If your bank drops the rate and you do not like the new rate, you can move your money to another bank. There is no penalty for switching banks or closing a savings account, unlike CDs which charge an early withdrawal fee.

Historically, savings APY has ranged from near zero to over 5%, depending on what the Federal Reserve was doing. During the 2008 financial crisis, rates dropped to nearly zero and stayed there for years. From 2022 to 2023, rates rose sharply and many online banks offered 4% to 5% APY. Rates will continue to change based on economic conditions and Federal Reserve decisions.

Comparing rates across banks

The easiest way to compare is to visit each bank's website and look for the APY on their savings account page. Most banks display it prominently. Write down the APY, the minimum balance required (if any), and any fees. Then use a simple calculator: multiply your expected balance by each APY to see the annual interest earned at each bank.

Some banks offer tiered rates, meaning the APY changes based on your balance. You might earn 4.5% on the first $25,000 and 4.0% on anything above that. Read the fine print to understand how your balance falls into each tier. A few banks offer promotional rates for new customers—a higher APY for the first three months, then a lower rate after. These can be worth it if you are moving a large balance, but do not count on the promotional rate lasting.

FDIC insurance covers up to $250,000 per depositor per bank, so if you have more than that, you need multiple banks or multiple account types at the same bank. A savings account and a money market account at the same bank are separate for insurance purposes, so you can have $250,000 in each and both are fully covered.

Frequently Asked Questions

Can I lose money in a savings account?

No. FDIC-insured savings accounts are protected up to $250,000, and the bank cannot take your money. The only way you lose purchasing power is through inflation—if inflation is 3% and your APY is 1%, you are earning less than inflation is costing you. This is why comparing rates matters: a 4.5% APY keeps up with inflation better than a 0.01% APY.

Is the APY the same as the interest rate?

Not exactly. The interest rate is the percentage the bank pays; the APY includes the effect of compounding. If a bank quotes an interest rate of 4.48% compounded daily, the APY will be slightly higher, around 4.5%. Banks are required to show you the APY, so that is the number to use when comparing banks.

Do I have to pay taxes on savings account interest?

Yes. Interest earned on a savings account is taxable income. The bank will 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 higher your APY and balance, the more interest you earn and the more you owe in taxes.

What if my bank goes out of business?

Your money is protected up to $250,000 by FDIC insurance. If the bank fails, the FDIC steps in and either transfers your account to another bank or sends you a check. This has happened to hundreds of banks over the decades, and FDIC insurance has protected depositors every time. You do not have to do anything—the FDIC handles it automatically.

Should I move my money to a higher-rate bank?

If your current bank pays 0.01% and another bank pays 4.5%, moving a large balance is worth the effort. On $10,000, that difference is $450 per year. Moving takes a few days and involves no fees or penalties. The only downside is if you have automatic bill payments or direct deposits set up—you will need to update those at the new bank.