What you earn depends on the bank, the account type, and the rate environment
The amount of interest a savings account earns is measured as an annual percentage yield (APY), which tells you what percentage of your balance the bank will pay you over one year. A savings account earning 4.5% APY on $10,000 will pay you $450 in interest over twelve months, assuming the rate stays the same and you don't withdraw money. The actual dollar amount you earn depends on three things: the APY the bank offers, how much money sits in the account, and how long it stays there.
Banks set their own rates based on what the Federal Reserve charges them to borrow money. When the Fed's rate is high, banks offer higher APYs to attract deposits. When the Fed's rate drops, bank rates follow. This means the rate you see today may not be the rate you earn next month or next year.
The difference between banks can be substantial. A traditional bank branch might offer 0.01% APY on a savings account, while an online bank offers 4.5% APY on the same type of account. On $10,000, that's $1 per year versus $450 per year — a difference of $449 that comes down to where you keep your money, not how much you have.
Key Takeaways
- Interest rates on savings accounts are expressed as APY and vary widely between banks, from under 0.1% at traditional branches to over 4% at online banks.
- The interest you earn is calculated on your account balance, so a higher balance in a higher-rate account produces significantly more money over time.
- Bank rates change when the Federal Reserve adjusts its benchmark rate, so the APY you earn today may be different in three months.
- Money market accounts and certificates of deposit (CDs) typically offer higher rates than standard savings accounts at the same bank.
- Interest compounds daily or monthly depending on the bank, meaning you earn interest on the interest you've already earned.
How banks calculate and pay your interest
Banks calculate interest using your account balance and the APY, but they don't wait until the end of the year to pay you. Most banks compound interest daily or monthly, which means they calculate how much you've earned and add it to your balance on a set schedule. When interest compounds daily, you start earning interest on that new balance immediately, creating a compounding effect that makes your money grow faster than simple math suggests.
For example, if you have $10,000 at 4.5% APY compounded daily, the bank divides 4.5% by 365 days to get a daily rate of about 0.0123%. On day one, you earn roughly $1.23. On day two, you earn interest on $10,001.23, not just the original $10,000. Over a year, daily compounding adds up to noticeably more than if the bank calculated interest once at the end of the year.
Interest is typically deposited into your account monthly, though some banks deposit it quarterly or annually. You can see the exact compounding schedule and deposit frequency in the account's disclosure document, which the bank must provide before you open the account.
Why rates differ so much between banks
Online banks offer higher rates than brick-and-mortar branches because they have lower operating costs. They don't maintain physical locations, employ as many staff members, or spend money on branch infrastructure. Those savings get passed to customers in the form of higher APYs. A large national bank with hundreds of branches may offer 0.01% APY, while an online-only bank offers 4.5% APY on the identical account type.
Credit unions sometimes offer competitive rates as well, though not always higher than online banks. Credit unions are member-owned, so they may prioritize rates for members over maximizing profit. The rate you receive depends on the specific credit union and the current rate environment.
Banks also offer different rates for different account types. A money market account typically earns more than a standard savings account at the same bank. A certificate of deposit (CD) usually earns the most, but your money is locked in for a set term — three months, one year, five years — and you pay a penalty if you withdraw early.
How to compare rates across banks
The only number that matters when comparing savings accounts is the APY, not the interest rate alone. APY includes the effect of compounding, so it shows you the true annual return. Two banks might advertise different rates, but the one with daily compounding and a higher APY will earn you more money.
You can find current rates on bank websites, on financial comparison sites, or by calling the bank directly. Rates change frequently — sometimes weekly — so a rate you see today may be different by the time you open an account. Check the rate again just before you deposit money.
When comparing, also check whether the bank charges monthly maintenance fees or requires a minimum balance. A high APY means nothing if you pay $10 per month in fees. Some banks waive fees if you maintain a certain balance or set up direct deposit, so read the full account terms.
What happens to your rate when the Federal Reserve changes policy
The Federal Reserve sets a target range for the federal funds rate, which is the rate banks charge each other to borrow overnight. When the Fed raises this rate, banks typically raise the APYs they offer on savings accounts within weeks or months. When the Fed cuts rates, bank APYs fall as well, though sometimes more slowly.
Your existing account rate is not locked in unless you have a CD. If you have a regular savings account earning 4.5% APY and the Fed cuts rates, your bank may lower your APY to 3.5% or lower. You won't receive a notice for small rate cuts, so check your account terms or call the bank if you want to know your current rate.
This is why some people move money between banks when rates change. If your current bank drops its rate to 1% and another bank offers 4%, moving your balance to the new bank means you earn four times as much interest on the same amount of money.
How much interest you'll actually earn: real examples
The dollar amount you earn depends on your balance, the APY, and how long the money stays in the account. Here are three scenarios with current rate ranges (rates vary by bank and change over time):
| Balance | APY | Interest Earned in One Year | Interest Earned in Five Years |
|---|---|---|---|
| $5,000 | 0.01% (traditional bank) | $0.50 | $2.50 |
| $5,000 | 4.5% (online bank) | $225 | $1,237 |
| $25,000 | 4.5% (online bank) | $1,125 | $6,185 |
| $100,000 | 4.5% (online bank) | $4,500 | $24,740 |
These examples assume the rate stays constant and you don't add or withdraw money. In reality, rates change and most people deposit or withdraw funds throughout the year, which affects the total interest earned.
FDIC insurance doesn't affect how much interest you earn
Federal Deposit Insurance Corporation (FDIC) insurance protects your money if the bank fails — it doesn't determine how much interest you earn. Every bank that offers savings accounts must carry FDIC insurance up to $250,000 per depositor per account type. This protection is free and automatic; you don't pay for it through lower interest rates.
Some people worry that banks offering very high rates are risky, but FDIC insurance means your money is protected regardless of the bank's financial health. A small online bank offering 4.5% APY is just as safe as a large national bank offering 0.01% APY, as long as both are FDIC-insured. You can check whether a bank is FDIC-insured on the FDIC's website.
Frequently Asked Questions
Do I have to pay taxes on savings account interest?
Yes. Interest earned on a savings account is taxable income. If you earn $100 or more in interest during the year, the bank will send you a 1099-INT form in January, and you'll report that income on your tax return. Interest from savings accounts is taxed as ordinary income at your regular tax rate.
Can a bank lower my interest rate without telling me?
Yes. Banks can change rates on savings accounts at any time without advance notice unless your account is a CD with a locked-in rate. You should check your account terms periodically or set a reminder to compare rates at your bank to rates elsewhere. If your rate drops significantly, moving your money to a higher-rate bank is an option.
What's the difference between APY and APR?
APY (annual percentage yield) includes the effect of compounding and shows your true annual return. APR (annual percentage rate) does not include compounding. For savings accounts, always compare APY to APY, not APR. Banks must disclose the APY in account disclosures.
Will my interest rate be higher if I keep a larger balance?
No. The APY is the same regardless of your balance. A $5,000 balance and a $100,000 balance at the same bank earn the same APY. However, the larger balance earns more total interest dollars because the percentage is applied to a bigger number.
Is it better to put money in a CD or a savings account?
CDs typically offer higher APYs than savings accounts at the same bank, but your money is locked in for a set term. If you need access to your money, a savings account is better. If you won't touch the money for one year or longer, a CD may earn you more interest. Compare the CD rate to the savings account rate to see if the extra interest is worth giving up access.