What you earn depends on the interest rate your bank sets and how much money sits in the account

The amount your savings account earns is determined by two things: the annual percentage yield (APY) your bank offers and the balance you keep in the account. APY is the rate of return you get on your money over one year, expressed as a percentage. A bank offering 4.50% APY means that if you keep $1,000 in the account for a full year without adding or withdrawing money, you would earn $45 in interest.

Banks set their own APY rates and change them frequently—sometimes weekly. The rate you see today may be different next month. Online banks typically offer higher APY than brick-and-mortar banks because they have lower overhead costs. Traditional banks often offer rates between 0.01% and 0.50%, while online savings accounts currently range from 4.00% to 5.35%, though these figures shift as the Federal Reserve adjusts its benchmark rates.

Interest compounds, meaning you earn interest on your interest. If your account compounds daily, the bank calculates and adds interest to your balance every day, and tomorrow's interest is calculated on today's larger balance. Monthly compounding is more common and still works in your favor, just more slowly than daily compounding.

Key Takeaways

  • Your earnings equal the APY rate multiplied by your account balance, and the rate your bank offers can vary widely depending on whether you bank online or at a traditional branch.
  • Banks change their APY rates regularly in response to Federal Reserve decisions, so the rate you lock in today may drop or rise within weeks.
  • Interest compounds at different intervals—daily, monthly, or quarterly—and more frequent compounding means slightly higher total earnings on the same balance.
  • High-yield savings accounts at online banks currently earn roughly 10 to 100 times more than traditional bank savings accounts on the same dollar amount.

How to calculate what you will earn in a year

The basic formula is straightforward: multiply your account balance by the APY rate. If you have $5,000 in an account earning 4.50% APY, you multiply $5,000 by 0.045 to get $225 in annual interest. That $225 is what the bank will add to your account over twelve months.

This calculation assumes your balance stays the same all year. If you add money or withdraw money, the interest earned on those deposits or withdrawals is calculated only for the time they sit in the account. If you deposit an additional $2,000 halfway through the year, that $2,000 earns interest for only six months, not twelve.

Most banks provide an interest calculator on their website where you enter your balance and the APY, and the tool shows you the projected annual earnings. You can also check your account statements—banks are required to show you how much interest you earned each month.

Why APY rates change and what that means for your money

Banks adjust their APY rates based on what the Federal Reserve does with its benchmark interest rate. When the Fed raises rates, banks can afford to pay more on savings accounts because they are earning more on the money they lend out. When the Fed cuts rates, banks lower what they pay savers. The Fed has raised rates significantly since 2022, which is why savings account rates are much higher now than they were in 2020 and 2021.

A rate that is high today may drop within weeks or months. If you see a 5.30% APY offer, that rate is not locked in for a year—it can change at any time. Some banks lower rates gradually as the Fed signals future cuts; others drop rates suddenly. Reading the fine print on the bank's website tells you whether the rate is may provide for any period or subject to change without notice.

This is why comparing rates across banks matters. Moving $10,000 from a bank paying 0.50% APY to one paying 4.50% APY means earning $400 more per year on the same money. Over five years, that difference grows to $2,000 or more, depending on how rates move.

The difference between APY and interest rate

APY (annual percentage yield) and interest rate are related but not identical. The interest rate is the percentage the bank pays on your balance. APY is the interest rate plus the effect of compounding. If a bank quotes you a 4.50% interest rate compounded daily, the actual APY will be slightly higher—perhaps 4.60%—because you earn interest on your interest every single day.

Banks are required to disclose the APY, not just the interest rate, so when you compare accounts, always look at the APY number. That is the true measure of what you will earn. The difference between interest rate and APY is usually small—often less than 0.10%—but it adds up over time, especially on larger balances.

Comparing earnings across different account types

Not all savings accounts earn the same rate. High-yield savings accounts at online banks currently earn the most—typically 4.00% to 5.35% APY. Traditional savings accounts at brick-and-mortar banks earn much less, often 0.01% to 0.50% APY. Money market accounts sometimes offer rates between these two, usually 2.00% to 4.50% APY, though they may require a higher minimum balance.

Certificates of deposit (CDs) lock your money away for a set period—three months, one year, five years—and in exchange offer a fixed APY that is often higher than a savings account rate. A one-year CD might pay 5.00% APY while a high-yield savings account pays 4.75%, but you cannot touch the CD money without paying a penalty. Regular savings accounts give you access to your money anytime, which is why they pay less.

The trade-off is between rate and flexibility. A high-yield savings account earning 4.75% APY lets you withdraw money whenever you need it. A CD earning 5.25% APY locks your money for a year. For an emergency fund, the savings account is usually the better choice. For money you will not need for a year or more, the CD might earn you more.

What happens to your earnings if you withdraw money early

If you withdraw money before the end of the year, you earn interest only on the balance that stayed in the account for the full period. If you keep $5,000 in an account earning 4.50% APY for six months, then withdraw $2,000, you earn interest on $5,000 for six months and on $3,000 for the remaining six months. The bank calculates this automatically and deposits the correct amount of interest.

Savings accounts have no penalty for early withdrawal—you can take your money out anytime without losing interest you have already earned. CDs are different: withdrawing before the maturity date triggers an early withdrawal penalty, which is a fee that reduces your earnings. The penalty amount varies by bank and CD term, but it can be substantial enough to wipe out several months of interest.

Money market accounts sometimes limit the number of withdrawals you can make per month without penalty. Check your account agreement to see whether there are any restrictions on how often you can move money out.

How to find the highest-earning account for your situation

Start by listing what you need: Do you need access to the money within the next year, or can you lock it away? How much are you depositing? Are you comfortable banking entirely online, or do you need a physical branch? Once you know your constraints, compare APY rates across banks that meet those criteria.

Websites like Bankrate, DepositAccounts, and NerdWallet maintain updated lists of current APY rates across hundreds of banks and account types. You can filter by account type, minimum balance, and whether the bank has physical branches. Call or visit the bank's website to confirm the rate is still current—rates change frequently enough that a list from last week may be outdated.

Open an account at the bank offering the rate that works best for you. Most online banks let you open an account in minutes and link it to an existing checking account for transfers. You can move money between banks as rates change, though some people keep accounts at multiple banks to lock in different rates across different time horizons.

Frequently Asked Questions

Do I have to pay taxes on the interest my savings account earns?

Yes. Interest earned on a savings account is taxable income. Banks send you a 1099-INT form at the end of the year showing how much interest you earned, and you report that amount on your tax return. The amount of tax you owe depends on your tax bracket and total income.

What is the minimum balance I need to earn interest?

It varies by bank. Some accounts earn interest on any balance, even $1. Others require a minimum balance of $500, $1,000, or more. If your balance drops below the minimum, some banks stop paying interest entirely; others just pay a lower rate. Check the account terms before opening.

How often does the bank add interest to my account?

Banks typically add interest monthly, though some add it daily or quarterly. The frequency does not change how much you earn over a full year, but daily compounding means slightly more total interest because you earn interest on your interest more often. Your account statement shows when interest was deposited.

Can I move my money to a different bank if rates drop?

Yes. There is no penalty for closing a savings account and moving your money to another bank. You can open a new account at any bank offering a higher rate and transfer your balance. Some people maintain accounts at multiple banks to take advantage of different rates or to keep balances under the FDIC insurance limit of $250,000 per bank.

What if my bank lowers the APY after I open the account?

Banks can lower rates at any time unless the account agreement specifies a may provide rate period. You have no obligation to stay—you can withdraw your money without penalty and move it to a bank with a higher rate. Most banks notify you before a rate drop, usually by email or through your online banking portal.