What a savings account earns depends on the interest rate and how much you have saved
A savings account earns money through interest—a percentage of your balance that the bank pays you for letting them use your money. The amount you earn is calculated by multiplying your account balance by the interest rate, then dividing by the number of days in a year. If you have $1,000 in an account earning 4.5% annual interest, you earn roughly $45 per year, or about $3.75 per month.
The actual amount varies based on three things: how much money sits in the account, what interest rate the bank offers, and how long the money stays there. Banks change their rates frequently—sometimes weekly—so the rate you see today may not be the rate you earn next month. The money you earn also depends on whether interest compounds daily, monthly, or yearly; daily compounding means you earn interest on your interest more often.
Most savings accounts today earn between 0.01% and 5.35% annual interest, depending on the bank and current economic conditions. Online banks typically offer higher rates than brick-and-mortar banks because they have lower overhead costs. The Federal Reserve sets a benchmark rate that influences what banks offer, but each bank decides its own rate independently.
Key Takeaways
- Interest earned equals your balance multiplied by the annual interest rate, divided by 365 days.
- Online banks usually offer higher interest rates than traditional banks, sometimes 10 to 50 times higher.
- Interest rates change frequently, so the rate you earn this month may differ from next month.
- Daily compounding means you earn interest on the interest you already earned, which increases your total over time.
- A high-yield savings account at an online bank earning 4% to 5% will earn roughly $40 to $50 per year on every $1,000 saved.
How interest rates differ between bank types
Traditional banks with physical branches typically offer rates between 0.01% and 0.5% on savings accounts. These banks have higher costs—rent, staff, equipment—so they pass lower rates to customers. A $10,000 balance at 0.1% earns about $10 per year.
Online banks and credit unions often offer rates between 4% and 5.35%, sometimes higher. Because they operate without branch locations, they can afford to pay depositors more. The same $10,000 at 4.5% earns $450 per year. This difference compounds over time: after five years, the online bank account would earn roughly $2,250 while the traditional bank account would earn about $50.
Money market accounts and certificates of deposit (CDs) sometimes offer higher rates than savings accounts at the same bank, though they come with restrictions. A money market account may require a higher minimum balance or limit how many withdrawals you can make per month. A CD locks your money away for a set period—three months, one year, five years—and penalizes you if you withdraw early, but pays a may provide rate for that entire period.
How to calculate what you'll earn over time
The simplest calculation is annual earnings: multiply your balance by the interest rate. A $5,000 balance at 3% earns $150 per year. Divide by 12 to find monthly earnings: $150 ÷ 12 = $12.50 per month.
For longer periods, compounding matters. If your bank compounds interest daily, you earn interest on yesterday's balance plus yesterday's interest. After one year, a $5,000 balance at 3% compounded daily grows to about $5,153.60—earning $153.60 instead of exactly $150. After five years, the same account grows to about $5,796, earning $796 total.
Most banks publish an Annual Percentage Yield (APY), which already includes the effect of compounding. The APY is the actual percentage your money will grow in one year. Use the APY number for your calculations—it's more accurate than the base interest rate alone.
Why your earnings might change month to month
Banks adjust interest rates based on what the Federal Reserve does and what other banks are offering. When the Fed raises its benchmark rate, banks may raise savings account rates. When the Fed cuts rates, banks usually cut savings rates too, sometimes within days. A rate that was 4.5% one month might drop to 4.25% the next.
Your earnings also change if your balance changes. If you deposit $2,000 one month, that extra money earns interest for only part of the month, so your total earnings that month will be higher than usual. If you withdraw $3,000, your earnings drop for that month and all following months until you deposit again.
Some banks offer promotional rates for new customers—a higher rate for the first three or six months, then a lower rate afterward. Read the fine print before opening an account to understand when the promotional rate ends and what the regular rate will be.
Comparing what different account types earn
| Account Type | Typical Rate Range | Earnings on $10,000 Per Year | Main Restriction |
|---|---|---|---|
| Traditional savings account | 0.01% to 0.5% | $1 to $50 | None |
| Online savings account | 4% to 5.35% | $400 to $535 | None |
| Money market account | 4% to 5.25% | $400 to $525 | Limited withdrawals per month |
| 3-month CD | 4.5% to 5.5% | $450 to $550 | Money locked for 3 months |
| 1-year CD | 4.5% to 5.6% | $450 to $560 | Money locked for 1 year |
What reduces or eliminates your earnings
Monthly maintenance fees eat into your interest earnings. If your account charges a $10 monthly fee and you earn $15 in interest, your net gain is only $5. Some banks waive fees if you maintain a minimum balance—often $500 to $2,500—or set up direct deposit. Read the fee schedule before opening an account.
Taxes also reduce what you keep. Interest income is taxable as ordinary income at your federal tax rate and, in most states, your state tax rate. If you earn $500 in interest and your tax rate is 22%, you owe $110 in taxes, leaving you with $390. The bank will send you a 1099-INT form at tax time listing all interest earned.
Inflation reduces the real value of your earnings. If your account earns 2% interest but inflation is 3%, your money is actually losing purchasing power. This is why higher-yield accounts matter more in high-inflation periods—a 4.5% rate beats inflation even when prices are rising fast.
Where to find current interest rates
Bank websites display their current rates on the savings account product page. Rates shown online are usually current as of that day, but call the bank to confirm before opening an account, since rates can change daily.
Comparison websites like Bankrate, DepositAccounts, and NerdWallet list rates from multiple banks side by side, updated daily. These sites let you filter by account type, minimum balance, and other features. They don't charge you to use them—banks pay them for referrals.
The Federal Reserve's website publishes the current benchmark rate and historical rate changes. This helps you understand why your bank's rate might have changed. Your own bank's website or app shows your current rate and year-to-date interest earned.
Frequently Asked Questions
How often does the bank add interest to my account?
Most banks compound and deposit interest daily, meaning they calculate it every day and add it to your balance once per month or once per quarter. Some older accounts compound monthly or quarterly. Check your account agreement or call the bank to confirm. Daily compounding means you earn slightly more because interest gets added to your balance more often.
Will I owe taxes on the interest I earn?
Yes. Interest income is taxable at your federal tax rate and usually your state tax rate too. If you earn $500 or more in interest during the year, the bank sends you a 1099-INT form to file with your taxes. Even if you earn less than $500, you still owe tax on it—you just won't receive a 1099-INT.
Is my money safe if the interest rate drops?
Yes. Your principal—the money you deposited—is protected by FDIC insurance up to $250,000 per bank. If the bank fails, the FDIC pays you back. Interest rate drops don't affect money already in the account; they only affect new deposits and future interest calculations. If rates drop, you can move your money to a bank offering a higher rate.
What's the difference between APR and APY?
APR (Annual Percentage Rate) is the base interest rate without compounding. APY (Annual Percentage Yield) includes the effect of compounding—it's what you actually earn. Always use APY to compare accounts, because it shows the real return on your money.
Can I earn more by opening multiple savings accounts?
You can hold multiple accounts at different banks, and each account earns interest separately. However, FDIC insurance covers only $250,000 per bank, so if you have $300,000 in savings, you'd want to split it across two banks to keep all of it insured. Opening multiple accounts at the same bank doesn't increase your earnings—the interest rate is the same regardless of how many accounts you have.