The basic formula for savings account interest
Interest earned on a savings account depends on three things: how much money you have in the account, what annual percentage yield (APY) the bank pays, and how long the money sits there. The simplest way to calculate it is: Principal × APY ÷ 365 × Number of Days = Interest Earned.
If you have $5,000 in an account earning 4.5% APY and leave it untouched for one year, you earn $225. If you leave it for 90 days, you earn about $55.48. Most banks calculate interest daily but pay it monthly or quarterly, so your balance grows in small increments rather than one lump sum at year's end.
The catch is that most savings accounts use daily compounding, which means interest earned each day gets added to your balance, and then the next day's interest is calculated on that larger amount. This makes the actual interest slightly higher than the simple formula above, but the difference is usually small for everyday balances.
Key Takeaways
- Interest earned equals your account balance multiplied by the APY, divided by 365, then multiplied by the number of days your money sits in the account.
- Daily compounding means interest paid each day gets added to your balance before the next day's interest is calculated, making your total earnings slightly higher than simple interest.
- Banks are required to disclose the APY, which already accounts for compounding, so you can compare rates fairly across different banks.
- Moving money in or out of the account changes the calculation because interest is based on the actual balance each day.
How daily compounding changes your earnings
When a bank compounds interest daily, it calculates how much you earned that day and adds it to your balance before calculating the next day's interest. Over a full year, this compounds to noticeably more than simple interest, especially at higher APY rates.
For example, $10,000 at 4.5% APY compounded daily earns about $460 over a year, not $450. The extra $10 comes from earning interest on the interest. With larger balances or higher rates, the difference grows. A $50,000 balance at 5.0% APY compounded daily earns about $2,564 instead of $2,500.
The APY figure your bank publishes already includes the effect of daily compounding, so you do not need to adjust it. When you see "4.5% APY," that is the actual return you will get if you leave the money untouched for a year.
What happens when you add or withdraw money
Interest is calculated on the balance that actually sits in the account each day. If you deposit $2,000 on the 15th of the month, that $2,000 only earns interest starting on the 15th. If you withdraw $1,000 on the 20th, the remaining balance earns interest from the 20th forward.
Banks track this by calculating interest on the average daily balance or the daily balance method. Most use the daily balance method, which means they add up what you had each day of the month and divide by the number of days. If you had $5,000 for 15 days and $7,000 for 16 days, your average daily balance for that month is about $6,067.
Some banks also have a grace period: they may not charge interest on overdrafts or may not count a withdrawal against your balance until the next business day. Read your account agreement to see how your specific bank handles deposits and withdrawals.
Using a calculator versus doing it by hand
For a single deposit held for a full year, the math is simple enough to do on paper or with a basic calculator. Multiply your balance by the APY and you have your annual interest. Divide by 12 for a monthly estimate.
For anything more complex—multiple deposits, withdrawals, or partial-year calculations—a spreadsheet or online calculator saves time and reduces errors. Many banks provide calculators on their websites that show you what a specific balance will earn over a specific time period at their current APY.
If you want to build your own spreadsheet, the formula is: =Principal × (1 + APY/365)^Days − Principal. This accounts for daily compounding automatically. Plug in your actual numbers and it gives you the exact interest earned.
How APY changes affect your earnings
The APY your bank offers is not fixed forever. Banks raise and lower rates based on what the Federal Reserve does and what competitors are offering. A 0.5% difference in APY sounds small but adds up fast on larger balances.
On a $25,000 balance, the difference between 4.0% APY and 4.5% APY is $125 per year. On $100,000, it is $500 per year. If you are holding a large balance for several years, shopping for a higher APY at a different bank can mean hundreds or thousands of dollars in additional earnings.
When your bank lowers its APY, your interest earnings drop immediately on any new interest calculations. When it raises the rate, your earnings increase. Check your account statements monthly to see what rate you are actually earning, because it may have changed since you opened the account.
Interest earned versus interest paid
Interest earned is what the bank owes you based on your balance and the APY. Interest paid is when the bank actually deposits that money into your account. These do not always happen on the same day.
Most banks calculate interest daily but pay it monthly. Some pay quarterly. A few high-yield accounts pay daily. Check your account agreement or the bank's website to see the payment schedule. Until interest is actually paid into your account, it does not show up in your balance and does not earn interest itself (though some banks do compound paid interest immediately).
If you close the account before interest is paid, you may lose the interest earned but not yet paid. Some banks pay accrued interest even after closure, but others do not. Ask before you close an account if you want to know whether you will receive unpaid interest.
Comparing interest across different banks
Because all banks must disclose APY the same way, you can compare rates directly. A 4.5% APY at Bank A is the same as a 4.5% APY at Bank B—the compounding is already built in.
The variables that change your actual earnings are the APY itself, how often interest is paid, and whether the bank charges fees that reduce your balance. A bank paying 4.5% APY with a $10 monthly fee may earn you less than a bank paying 4.0% APY with no fees, depending on your balance.
Use a calculator to compare: take the APY, subtract any annual fees divided by your balance, and see what you actually keep. A $25,000 balance at 4.5% APY with a $60 annual fee nets you about $1,065 instead of $1,125. The same balance at 4.0% APY with no fees nets you $1,000. The higher rate still wins, but the fee matters.
Frequently Asked Questions
Do I earn interest on interest in a savings account?
Yes, if the bank compounds interest daily or more frequently. Interest paid to your account becomes part of your balance, and the next interest calculation includes it. This is why compounding matters over time, especially on larger balances or higher rates.
What if my APY changes mid-year?
Your interest earnings change immediately. The new rate applies to all future interest calculations. If the rate drops from 4.5% to 4.0%, your daily interest amount decreases starting the day the change takes effect. Banks must notify you before lowering rates.
How do I know what my actual interest will be?
Check your monthly or quarterly statement. Banks must show the interest paid during that period. You can also call the bank or log into your account online to see the current APY and use a calculator to project future earnings based on your current balance.
Does the bank round interest up or down?
Banks typically round to the nearest cent when they pay interest. If your calculated interest is $55.486, the bank pays $55.49. The rounding rules are in your account agreement, though most banks round in your favor.
Can I lose money if interest rates drop?
No. Interest rates dropping means you earn less going forward, not that your balance shrinks. Your principal stays the same. You simply earn smaller interest payments each month until rates rise again or you move to a bank with a higher rate.