What you earn depends on the interest rate, how much you deposit, and how long you leave it there
A savings account makes money through interest—a percentage of your balance that the bank pays you each month or year. The amount you earn is not fixed. It changes based on three things: the interest rate the bank offers, the total amount sitting in your account, and how often the bank compounds the interest (adds it back to your balance so you earn interest on the interest).
Right now, savings account rates range from nearly zero percent at some large national banks to around 4 to 5 percent at online banks and credit unions. That difference matters. On a $10,000 balance, a 0.01 percent rate earns you about $1 per year. A 4.5 percent rate earns you about $450 per year. The bank's rate is the single biggest factor in how much you make.
The second factor is your balance. A higher rate on a smaller balance might earn less than a lower rate on a larger balance. And the longer your money sits untouched, the more interest compounds—meaning you earn interest on the interest you already earned.
Key Takeaways
- Your earnings depend on the bank's interest rate, your account balance, and how often interest compounds, not on any action you take.
- Online banks and credit unions typically offer rates between 4 and 5 percent, while large national banks often offer less than 0.5 percent.
- You can calculate your expected earnings by multiplying your balance by the annual rate and dividing by 12 for a monthly estimate.
- Interest is taxable income, and the bank will send you a 1099-INT form if you earn $10 or more in a year.
How to calculate what you'll earn
The math is straightforward. Take your account balance, multiply it by the annual interest rate (as a decimal), and divide by 12 to get your monthly earnings. For example: a $5,000 balance at 4.5 percent annual interest earns roughly $18.75 per month, or $225 per year.
That calculation assumes the rate stays the same all year and you do not add or withdraw money. In reality, rates change—sometimes monthly—and most people deposit or spend from their savings account. If your balance grows during the year, your earnings grow too. If rates drop, your earnings drop.
Most banks show your current rate and estimated annual earnings right on your account dashboard or in the account details section. You do not have to calculate it yourself, but knowing the formula helps you compare accounts before you open one.
Why rates vary so much between banks
Large national banks like Bank of America, Chase, and Wells Fargo keep savings rates very low—often under 0.5 percent—because they have high overhead costs and do not need to compete aggressively for deposits. They have millions of customers already.
Online banks like Marcus, Ally, and Discover have lower operating costs because they have no physical branches. They pass those savings to customers in the form of higher rates. Credit unions, which are member-owned rather than shareholder-owned, also tend to offer better rates than big banks.
The Federal Reserve's interest rate also influences what banks offer. When the Fed raises its benchmark rate, banks raise savings rates. When the Fed cuts rates, banks cut rates too—sometimes within days. This is why the rate you see today may not be the rate you earn six months from now.
How compounding affects your total earnings
Compounding means the bank adds your earned interest back to your balance, and then pays you interest on that larger amount the next period. Most savings accounts compound daily or monthly. Daily compounding earns you slightly more than monthly compounding because interest accrues more often.
The difference is small on modest balances. On $10,000 at 4.5 percent, daily compounding earns about $460 per year versus about $459 with monthly compounding. But on larger balances or over many years, compounding adds up. A $100,000 balance at 4.5 percent compounds to about $4,600 in year one, then $4,700 in year two because you are earning interest on the interest.
You do not have to do anything to benefit from compounding. It happens automatically. The bank handles all the math.
When interest gets paid to your account
Banks deposit interest into your account on different schedules. Some pay monthly, some quarterly, and some annually. Check your account terms or ask the bank when interest posts. Monthly is most common for online banks.
The interest appears as a deposit in your transaction history. You can withdraw it, spend it, or leave it in the account to compound. Once it is in your account, it is yours to use however you want.
Taxes on savings account interest
Interest you earn is taxable income. You report it on your federal tax return using the amount the bank reports to you on a 1099-INT form, which they mail or email by January 31 each year if you earned $10 or more in interest during the previous year.
The interest is taxed at your ordinary income tax rate, not at a special rate. If you earn $200 in interest and you are in the 22 percent tax bracket, you owe roughly $44 in federal tax on that interest. Some states also tax interest income.
This is one reason high-yield savings accounts matter—the higher rate means more of your money stays with you after taxes. A 4.5 percent rate still leaves you with more after-tax earnings than a 0.1 percent rate, even after you pay taxes on the interest.
Frequently Asked Questions
Can I lose money in a savings account?
No. The bank cannot take money from your account without your permission, and the Federal Deposit Insurance Corporation (FDIC) insures deposits up to $250,000 per account holder per bank. You earn interest or earn nothing, but you do not lose principal.
What happens to my interest if I withdraw money mid-month?
Most banks calculate interest based on your daily balance. If you withdraw money partway through the month, you earn interest only on the balance for the days you held it. The bank recalculates and pays you accordingly.
Do I have to do anything to earn interest?
No. Once you open the account and deposit money, the bank automatically pays interest based on its rate and your balance. You do not need to make deposits, meet a minimum balance (though some accounts require one), or take any action.
Why is my interest rate lower than the advertised rate?
Banks sometimes advertise a promotional rate that applies only to new deposits for a limited time, then drops to a lower standard rate. Read the account terms carefully to see when the promotional period ends and what your rate will be after.
How often should I check my savings account rate?
Rates change frequently, especially when the Federal Reserve adjusts its benchmark rate. Check your rate every few months. If it drops significantly and other banks offer much higher rates, moving your money to a different bank may earn you more interest.