Yes, savings accounts accrue interest, but the amount depends on the bank and the rate they offer

A savings account earns interest — money the bank pays you for keeping your money there. The bank takes deposits from many customers, lends that money out at higher rates, and shares some of that profit with you as interest. The amount you earn depends on three things: how much money sits in the account, how long it stays there, and what annual percentage yield (APY) the bank pays.

Not all savings accounts earn the same rate. Banks set their own rates based on what the Federal Reserve charges them to borrow money. When the Fed raises rates, banks typically raise what they pay on savings. When the Fed lowers rates, banks lower their rates too. This means the interest you earn can change over time, even if you do nothing.

The interest gets added to your account automatically, usually monthly or daily depending on the bank. Once interest is added, it becomes part of your balance, and you earn interest on that interest too — a process called compounding. The more often interest compounds, the more you earn.

Key Takeaways

  • Every savings account earns interest at a rate set by the bank, though rates vary widely between institutions.
  • The interest you earn depends on your balance, how long the money stays in the account, and the APY the bank offers.
  • Interest compounds — usually monthly or daily — so you earn interest on the interest already added to your account.
  • Banks change their rates when the Federal Reserve changes its rates, so your earnings can shift without you making any changes.
  • High-yield savings accounts at online banks typically pay much more interest than traditional savings accounts at brick-and-mortar banks.

How banks calculate the interest you earn

Banks use your average daily balance to calculate interest. They add up what you had in the account each day of the month, divide by the number of days, and apply the APY to that average. If you deposit $5,000 on the first of the month and leave it there, your average daily balance is $5,000. If you deposit $5,000 on the 15th, your average daily balance is lower because you had less money there for half the month.

The formula is straightforward: (Balance × APY ÷ 365) × Number of Days. A $10,000 balance at 4.5% APY earning interest daily would generate roughly $1.23 per day. Over a year, that's about $450. The exact amount depends on how many days are in each month and whether the bank compounds daily or monthly.

Some banks compound interest daily, meaning they calculate and add interest every single day. Others compound monthly or quarterly. Daily compounding earns you slightly more because you're earning interest on interest more frequently. The difference is small with lower balances but adds up with larger amounts over time.

The difference between savings accounts and other places to keep money

A money market account works like a savings account but usually pays higher interest in exchange for keeping a larger minimum balance. A certificate of deposit (CD) locks your money away for a set period — three months, one year, five years — and pays a fixed rate that doesn't change. You can't touch the money without a penalty, but the rate is may provide.

A regular checking account typically earns little to no interest. Banks treat checking accounts as transaction accounts, not savings vehicles. If you're keeping money you don't plan to spend soon, a savings account or money market account will earn you more.

A high-yield savings account is a savings account at an online bank that pays significantly more interest than a traditional bank. Online banks have lower overhead costs, so they pass more of their profit to customers. As of late 2024, high-yield savings accounts pay between 4% and 5.5% APY, while traditional banks often pay 0.01% to 0.5%. Over a year, $10,000 in a high-yield account earns $400 to $550, while the same amount in a traditional account earns $1 to $50.

When interest rates change and what that means for your account

The Federal Reserve sets a target range for the federal funds rate — the rate banks charge each other to borrow overnight. When the Fed raises this rate, banks raise the interest they pay on savings. When the Fed lowers it, banks lower their rates. This happens because banks' costs change, and they adjust what they pay customers to stay competitive.

Your bank can change your rate at any time, though most give you notice. Some banks lower rates quickly when the Fed cuts, but raise rates slowly when the Fed increases. Others move faster. You have no control over this, but you can move your money to a bank offering a better rate whenever you want.

Interest rate changes affect how much you earn over time. If you keep $50,000 in a savings account at 4.5% APY, you earn about $2,250 per year. If the bank drops the rate to 2%, you earn about $1,000 per year — a $1,250 difference. This is why comparing rates between banks matters, especially if you're holding a large balance.

How to find out what rate your bank is paying

Your bank discloses the APY in the account agreement you receive when you open the account. You can also find it on the bank's website, usually on the savings account product page. The APY is always listed as an annual percentage — for example, 4.25% APY. This is the rate you'll earn over a full year if the rate doesn't change.

If you can't find the rate online, call the bank or visit a branch and ask. Banks are required by law to disclose the APY before you open an account. Some banks also show your current APY in your online banking portal or mobile app, updated whenever they change the rate.

Comparing rates between banks takes minutes. Websites like Bankrate, DepositAccounts, and the Federal Deposit Insurance Corporation (FDIC) list current rates at banks across the country. You can sort by rate, minimum balance, or bank type to find accounts that match what you're looking for.

What happens to interest if you withdraw money early

Withdrawing money from a savings account does not trigger a penalty — savings accounts have no withdrawal limits or fees for taking money out. Your interest earnings are based on your average daily balance, so if you withdraw $5,000 midway through the month, the interest you earn that month is calculated on a lower average balance.

This is different from a CD, where withdrawing before the maturity date costs you a penalty, usually a few months of interest. Savings accounts are designed for money you might need, so banks don't penalize you for accessing it.

If you're trying to maximize interest, keeping a steady balance and leaving the money untouched for longer periods will earn you more. But the flexibility to withdraw without penalty is one of the main reasons people use savings accounts instead of CDs.

How interest is taxed

Interest you earn on a savings account is taxable income. The bank reports it to the IRS on a Form 1099-INT if you earn $10 or more in a calendar year. You report this interest on your tax return and pay income tax on it at your regular tax rate.

If you earn $500 in interest and you're in the 22% tax bracket, you owe roughly $110 in federal income tax on that interest. State income tax may apply too, depending on where you live. This is why the actual money you keep from interest earnings is less than the APY suggests.

Some states don't tax interest income, so if you live in one of those states, you keep more of what you earn. Check your state's tax rules or speak with a tax professional if you're unsure how your interest will be taxed.

Frequently Asked Questions

Do I earn interest every month or every year?

Interest compounds and is added to your account regularly — usually daily or monthly — but the APY is always stated as an annual rate. If a bank offers 4.8% APY, you earn roughly 0.4% per month, though the exact amount depends on the number of days in each month and how the bank compounds interest.

What's the difference between APY and APR?

APY (annual percentage yield) includes compounding and shows what you actually earn. APR (annual percentage rate) does not include compounding and is used mainly for loans and credit cards. For savings accounts, always look at the APY, not the APR.

Can I lose money in a savings account?

No. Your balance can only stay the same or grow. Interest is added to your account, never subtracted. The only way your balance decreases is if you withdraw money yourself. Savings accounts are insured by the FDIC up to $250,000 per account holder per bank.

Why do some banks pay more interest than others?

Online banks have lower costs than brick-and-mortar banks, so they can pay more interest and still make a profit. Traditional banks have physical branches, more employees, and higher overhead, so they pay less. Both are safe — the FDIC insures deposits at all banks equally.

If I move my money to a different bank, do I lose the interest I already earned?

No. Interest that has already been added to your account is yours to keep. When you transfer money to a new bank, you take that balance with you. You only stop earning interest at the old bank once the money leaves the account.