What you earn depends on the bank's rate, how much you deposit, and how long you leave it there
The amount of interest you earn in a savings account is calculated by multiplying your balance by the annual percentage yield (APY) the bank offers, then dividing by 12 for each month the money sits there. A $10,000 deposit at 4.50% APY earns roughly $450 per year, or about $37.50 per month. A $1,000 deposit at the same rate earns $45 per year. The actual dollar amount changes if you add more money, withdraw some, or if the bank changes its rate.
Banks set their own rates based on what the Federal Reserve does with its benchmark rate. When the Fed raises rates, banks typically raise savings rates within weeks. When the Fed cuts rates, banks usually cut savings rates more slowly. Right now, savings account rates range from nearly 0% at some large national banks to 4.50% or higher at online banks and credit unions. The difference between a 0.01% rate and a 4.50% rate on $10,000 is $449 per year—a real gap.
Interest compounds, meaning you earn interest on the interest you already earned. Most banks compound daily and credit it monthly, so your balance grows slightly faster than simple math suggests. After one year at 4.50% APY on $10,000, you have $10,450. After two years, you have $10,920.25, not $10,900, because the second year's interest was calculated on $10,450.
Key Takeaways
- Your earnings equal your balance multiplied by the APY rate; a $5,000 deposit at 4.00% APY earns $200 per year.
- Online banks and credit unions typically offer rates two to four percentage points higher than large national banks.
- Interest compounds daily at most banks, so you earn small amounts of interest on your interest.
- Your rate can change at any time, and banks often lower rates faster than they raise them.
- Money market accounts and certificates of deposit (CDs) sometimes offer higher rates than regular savings accounts, but with different withdrawal rules.
How to compare rates across different banks
The APY listed on a bank's website is the rate you will earn if you keep your money there for a full year without touching it. To compare fairly, look at the APY, not the interest rate—APY includes compounding and shows the true annual return. A bank advertising 4.45% APY will earn you more than one advertising 4.40% APY on the same balance, even though the difference looks small.
Check the rate on the bank's website directly, because rates change frequently and comparison sites sometimes lag. Write down the APY, the minimum balance required to earn that rate, and whether the rate applies to all balances or only balances above a certain amount. Some banks pay higher rates on balances over $100,000 and lower rates on smaller accounts.
Online banks almost always pay more than brick-and-mortar banks because they have lower overhead costs. Credit unions often pay competitive rates too, especially if you are a member. If you have $25,000 to deposit, spending 30 minutes comparing rates between five banks could earn you an extra $100 to $200 per year—money for doing nothing but choosing the right place to park your cash.
What happens when the Federal Reserve changes rates
The Federal Reserve sets a target range for the federal funds rate, which is the rate banks charge each other to borrow overnight. Banks use this as a benchmark when deciding what to pay you on savings. When the Fed raises its rate, banks raise savings rates within days or weeks. When the Fed cuts its rate, banks cut savings rates more slowly—sometimes taking months to lower what they pay you.
This asymmetry matters. If you lock money into a CD at 4.50% and the Fed cuts rates to 2.00%, your CD rate stays at 4.50% until it matures. But if you keep money in a regular savings account and rates fall, your earnings drop immediately. Conversely, if rates rise and your money is in a regular savings account, you benefit right away. If it is locked in a CD, you do not earn the higher rate until the CD matures.
You can check the Fed's current rate on the Federal Reserve's website. Most financial news outlets report when the Fed meets and what it decides. If you think rates might fall soon, a CD locks in today's higher rate. If you think rates might rise, a regular savings account lets you benefit without waiting.
Certificates of Deposit (CDs) versus regular savings accounts
A CD is a contract: you give the bank a sum of money for a fixed period—three months, six months, one year, five years—and the bank pays you a set APY for that entire period. In exchange, you cannot withdraw the money without paying a penalty, usually a few months' worth of interest. A regular savings account lets you withdraw anytime without penalty, but the rate can change monthly.
CDs almost always pay more than savings accounts because the bank knows exactly how long it has your money. A one-year CD might pay 4.75% while a savings account at the same bank pays 4.50%. A five-year CD might pay 5.00%. The longer you lock your money away, the higher the rate, because the bank is taking on more risk that interest rates will fall and it will be stuck paying you a high rate.
Choose a CD if you know you will not need the money for several years and you want to lock in today's rate. Choose a savings account if you might need the money sooner or if you think rates will rise and you want to benefit without waiting. Some people split the difference: put half in a one-year CD and half in a savings account, so part of their money is earning a higher rate while part stays accessible.
Money market accounts and how they compare
A money market account is a hybrid between a savings account and a checking account. It usually pays interest like a savings account—often at rates close to or slightly higher than regular savings accounts—but it also comes with a debit card and checks, like a checking account. The catch is that federal rules limit you to six withdrawals per month, and some banks charge monthly fees if your balance falls below a minimum.
Money market accounts rarely pay significantly more than savings accounts at the same bank, so they are most useful if you want check-writing ability and interest in one place. If your only goal is to earn the highest interest, a regular savings account or CD will usually serve you better. Compare the APY and any monthly fees before opening one.
How to calculate your earnings and track them over time
To estimate your annual earnings, multiply your balance by the APY and divide by 100. A $25,000 balance at 4.25% APY earns $1,062.50 per year. To find monthly earnings, divide the annual amount by 12: roughly $88.54 per month. This is an estimate because interest compounds daily, so the actual amount will be slightly higher.
Most banks show your interest earnings in your monthly statement or online account dashboard. You can also ask the bank to send you a year-end statement showing total interest earned, which you will need for your tax return if you earned $10 or more in interest during the year. The IRS requires you to report interest income on Form 1040, Schedule B.
If you want to track earnings across multiple accounts, create a simple spreadsheet with the balance, APY, and expected monthly earnings for each account. Update it quarterly to see how your interest is compounding. This is especially useful if you have money in multiple banks or if you are deciding whether to move money to a higher-paying account.
Why your rate might change and what to do about it
Banks change savings rates constantly, usually in response to Fed decisions but sometimes just because they want to attract or retain customers. A bank might lower its rate to reduce costs, or raise it to attract new deposits. You will not automatically move to a new rate—your existing balance stays at the rate you opened the account at, but new deposits and new accounts may earn a different rate. Some banks apply rate changes to all balances after giving notice, so read your account agreement or call to ask.
If your bank lowers its rate and you have a large balance, it may be worth moving to a higher-paying bank. Calculate how much you would earn at your current bank over the next year, then calculate how much you would earn at a new bank. If the difference is more than the hassle of moving, switch. Moving a savings account takes about 15 minutes: open the new account, provide your old account number, and the new bank usually transfers the money for you.
Set a reminder to check rates every three to six months, especially if the Fed is actively raising or cutting rates. A rate that was competitive six months ago might be below average now. Staying aware takes minimal time and can add hundreds of dollars per year to your earnings.
Frequently Asked Questions
Do I have to pay taxes on savings account interest?
Yes. Interest income is taxable as ordinary income. If you earned $10 or more in interest during the year, the bank sends you a Form 1099-INT and you report it on your tax return. The amount owed depends on your tax bracket. At a 24% tax rate, earning $450 in interest costs you about $108 in federal taxes.
What if I deposit money partway through the year?
Interest accrues daily based on your balance each day. If you deposit $10,000 on July 1 at 4.50% APY, you earn interest only on that $10,000 from July 1 onward, not for the first six months of the year. You will earn roughly $225 for the second half of the year, not $450.
Can I earn interest on money I withdraw before the year ends?
Yes. Interest is calculated daily, so if you deposit $5,000 and withdraw it after three months, you earn interest for those three months only. You do not lose the interest you already earned just because you withdrew the money.
Is there a limit to how much interest I can earn?
No. There is no cap on interest earnings. The more you deposit and the higher the rate, the more you earn. There is no maximum amount of interest income you can receive in a savings account.
What happens to my interest if the bank fails?
The Federal Deposit Insurance Corporation (FDIC) insures deposits up to $250,000 per account holder per bank. If a bank fails, the FDIC pays you your balance plus all accrued interest up to $250,000. This protection applies to savings accounts, checking accounts, and CDs.