The amount you earn depends on the account's APY, how much you deposit, and how long the money sits there

Your savings account interest comes from the bank paying you a percentage of your balance each year. That percentage is the annual percentage yield (APY). If you have $1,000 in an account with a 4.5% APY, you earn roughly $45 per year — though the exact amount depends on whether the bank compounds interest daily, weekly, or monthly, and whether you add or withdraw money during the year.

The real number that matters is what you'll actually see in your account after a set time. A high-yield savings account at an online bank might offer 4% to 5% APY right now. A traditional bank savings account might offer 0.01% to 0.5%. The difference between those two is enormous: $10,000 earning 4.5% APY makes $450 in a year, while $10,000 earning 0.01% makes $1.

Interest rates change. Banks raise and lower their APY based on what the Federal Reserve does with its benchmark rate. When the Fed raises rates, some banks increase their savings APY within days. When the Fed cuts rates, banks often drop their APY more slowly. If you lock in a high rate today, that rate may fall in six months — or it may stay the same for years. There is no way to predict it.

Key Takeaways

  • Your earnings equal your balance multiplied by the APY, divided by 12 for monthly interest, though most banks compound daily so the actual amount is slightly higher.
  • High-yield savings accounts currently pay 4% to 5% APY, while traditional bank savings accounts typically pay under 1%, making the choice between them worth hundreds of dollars per year on larger balances.
  • Interest rates are not locked in — banks can lower your APY at any time, so a 5% account today might pay 3% in six months if the Federal Reserve cuts rates.
  • The longer your money sits untouched, the more interest compounds, but most savings accounts have no penalty for withdrawals, so you can move money if a better rate appears elsewhere.

How to calculate what you'll earn

The simplest formula is: (Balance × APY) ÷ 12 = monthly interest. If you have $5,000 at 4.5% APY, you earn roughly $18.75 per month, or $225 per year. This assumes your balance stays the same and the APY does not change.

In reality, banks use daily compounding, which means they calculate interest on your balance every single day, then add that tiny amount back into your account. The next day, you earn interest on the slightly larger balance. Over a year, daily compounding adds a small but real boost — usually less than 0.1% extra, but it adds up on larger balances.

If your balance changes during the month — you deposit $2,000 or withdraw $500 — the bank recalculates based on your new balance. Most banks use the average daily balance method, meaning they track what you had each day, add those numbers up, and divide by the number of days in the month. This is why the exact interest you earn is hard to predict without a calculator.

Why different banks pay such different rates

Online banks typically pay higher APY than brick-and-mortar banks because they have lower overhead. They do not maintain physical branches, so they pass some of that savings to customers through better rates. A bank like Ally, Marcus, or Wealthfront might pay 4.5% APY on savings, while Chase or Bank of America might pay 0.01%.

Banks also compete for deposits. When one online bank raises its rate to 5%, others often follow within weeks to stay competitive. When rates are falling, banks drop their APY more slowly because they want to keep customers. This creates windows where one bank is clearly better than the others — but those windows close quickly.

The bank's safety matters too. All deposits up to $250,000 per account are insured by the Federal Deposit Insurance Corporation (FDIC), so the interest rate is the only real difference between banks. You are not taking on extra risk by choosing a smaller online bank with a higher rate.

What happens to your interest if rates fall

When the Federal Reserve cuts its benchmark rate, banks lower their savings APY — but not always immediately. Some banks drop rates within days. Others wait weeks or months. There is no rule forcing them to move at any particular speed.

If you have $50,000 earning 5% APY and the rate drops to 3%, you lose $1,000 per year in interest. That is why it makes sense to check your account's current APY every few months. If your bank has dropped its rate and others have not, moving your money to a different bank takes about 15 minutes and costs nothing.

You can also set up rate alerts through some banking apps or websites that notify you when your bank's APY changes. This does not prevent the drop, but it tells you when to shop around.

How much you need to make interest worth your time

At current rates, you need at least $1,000 to $2,000 in a high-yield account before the monthly interest becomes noticeable. With $1,000 at 4.5% APY, you earn about $3.75 per month. With $10,000, you earn about $37.50 per month. With $100,000, you earn about $375 per month.

Even small balances earn something, but the real benefit of high-yield savings shows up when you have money you are not planning to spend for at least a few months. If you have an emergency fund of $5,000 to $10,000 sitting in a traditional bank at 0.01%, moving it to a high-yield account could earn you $200 to $400 per year with zero extra work or risk.

The difference between savings accounts and money market accounts

Money market accounts often pay slightly higher APY than savings accounts at the same bank, but they come with limits. Most money market accounts let you make only three to six withdrawals per month before charging a fee. Savings accounts have no withdrawal limit. If you need to access your money frequently, a savings account is simpler.

Both are FDIC-insured up to $250,000, and both earn interest daily. The choice usually comes down to whether you can live with the withdrawal restrictions in exchange for a slightly higher rate. For an emergency fund you might touch several times a year, a savings account is usually better. For money you are truly setting aside and not touching, a money market account might earn you an extra 0.1% to 0.3% APY.

When to move your money to a different bank

If your current bank's APY has dropped more than 0.5% below what other banks are offering, it is worth moving. The process is straightforward: open an account at the new bank, request an external transfer from your old bank, and the money arrives in three to five business days. You do not have to close the old account, though many people do once the balance is zero.

Some banks offer sign-up bonuses for new customers — typically $100 to $500 if you deposit a certain amount and keep it there for a set period. These bonuses are real money, but read the fine print. Some require you to maintain a minimum balance or make a certain number of deposits. Others expire if you withdraw money before the deadline.

The cost of switching is zero, so there is no reason to stay with a bank paying 0.5% when another is paying 4.5%. The only exception is if you have a checking account at the same bank and switching would complicate your bill payments or direct deposits — in that case, you might keep a small balance in the low-rate savings account and move the bulk of your money elsewhere.

Frequently Asked Questions

Does interest compound automatically or do I have to do something?

Interest compounds automatically. The bank calculates it daily and adds it to your balance without any action from you. You will see the interest appear in your account statement each month, and it starts earning interest itself the next day.

What if I withdraw money before the end of the month?

You still earn interest on the money you had in the account. Banks calculate interest based on your daily balance, so if you had $5,000 for 20 days and $3,000 for 10 days, you earn interest on both amounts for the time they were there. There is no penalty for withdrawals.

Can a bank lower my interest rate without warning?

Yes. Banks can change their APY at any time without notice, though most send an email or mail a letter. You are not locked into a rate. If your bank drops its rate, you can move your money to another bank offering a higher rate.

Is the interest I earn taxed?

Yes. Interest income is taxable as ordinary income. Banks send you a 1099-INT form each January if you earned $10 or more in interest during the year. You report this on your tax return. The bank does not withhold taxes automatically, so you may owe money at tax time.

What is the difference between APY and APR on a savings account?

APY includes compounding, while APR does not. For savings accounts, APY is the number that matters because it shows what you actually earn. APR is used for loans and credit cards. Always compare savings accounts using APY, not APR.