The amount you earn depends on the interest rate the bank offers and how much money you keep in the account

A savings account earns interest by paying you a percentage of your balance each month or year. The bank uses your money to lend to other customers, and they share a small portion of what they earn with you. How much you receive depends on two things: the annual percentage yield (APY) the bank advertises, and the actual dollar amount sitting in your account.

If you have $10,000 in an account earning 4.5% APY, you would earn roughly $450 over a year — though the exact amount varies slightly depending on how often the bank compounds interest (daily, monthly, or quarterly). If that same account earns 0.01% APY, you would earn about $1 per year on the same $10,000. The difference between these two rates is real and measurable, and it matters more the longer your money sits there.

Interest rates change constantly. Banks raise and lower their rates based on what the Federal Reserve does with its benchmark rate, how much competition exists in your area, and whether the bank wants to attract new deposits. An account earning 4.5% today might earn 3.8% in three months, or it might stay the same. Your bank will notify you of changes, but you need to check periodically to know whether your rate is still competitive.

Key Takeaways

  • Your earnings equal your account balance multiplied by the APY, divided by 12 for monthly interest or by 365 for daily compounding — so a $5,000 balance at 4% APY earns roughly $200 per year.
  • High-yield savings accounts at online banks typically pay 4% to 5% APY, while traditional brick-and-mortar banks often pay 0.01% to 0.5% APY for the same type of account.
  • Interest compounds, meaning you earn interest on your interest, but the effect is small in savings accounts — a $10,000 balance earning 4.5% APY grows to $10,450 after one year, not $10,460.
  • Your bank can change the interest rate at any time without your permission, so the rate you see today is not locked in unless the bank explicitly guarantees it in writing.
  • The Federal Deposit Insurance Corporation (FDIC) insures savings accounts up to $250,000 per depositor per bank, regardless of the interest rate — higher rates do not mean less protection.

How banks calculate what you earn each month

Banks use a straightforward formula: your balance multiplied by the APY, then divided by the number of times interest compounds per year. Most online banks compound interest daily, which means they calculate your earnings every single day and add them to your account. Traditional banks might compound monthly or quarterly, which results in slightly lower earnings on the same balance and rate.

Here is a concrete example. If you have $5,000 in an account earning 4.5% APY with daily compounding, the bank divides 4.5% by 365 days to get a daily rate of about 0.0123%. Each day, they multiply your current balance by that daily rate and add it to your account. After 30 days, you might have earned roughly $18.50. After a full year, you would have earned approximately $225 — slightly more than the straightforward $225 you would get from 4.5% of $5,000, because you earned interest on your interest.

The difference between daily and monthly compounding is small for most people. On a $5,000 balance at 4.5% APY, daily compounding earns you about $4 more per year than monthly compounding. On a $100,000 balance, the difference is roughly $80 per year. It matters more if you are comparing accounts with very different rates, or if you plan to keep a large balance for many years.

Why rates vary so much between banks

Online banks pay significantly higher interest rates than traditional banks because they have lower operating costs. They do not maintain physical branches, employ fewer staff, and do not spend money on building rent and utilities. They pass those savings to customers by offering rates that are often 10 to 20 times higher than what you would earn at a bank with a branch on your street.

Traditional banks also use savings deposits differently. They lend money to mortgage customers, car buyers, and business owners — loans that earn them much more interest than they pay you. Online banks often invest deposits in short-term securities or keep them in reserve, which generates lower returns, so they can afford to pay you more without cutting into their profit margin.

Competition also drives rates up and down. When many banks are competing for deposits, rates rise. When the Federal Reserve raises its benchmark rate, banks eventually raise savings rates too — though the lag can be weeks or months. When the Fed cuts rates, banks drop savings rates quickly, sometimes within days. You will see the biggest rate swings during periods when the Fed is actively changing policy.

What happens to your interest if you withdraw money mid-month

Most savings accounts calculate interest on your balance at the end of each day or at the end of each month, depending on the bank's policy. If you withdraw money before interest is credited, you lose the interest you would have earned on that withdrawn amount. If you withdraw money after interest has already been added to your account, you keep what you earned.

For example, if you have $10,000 on the first day of the month and withdraw $5,000 on the 15th, a bank that compounds daily will have already credited you with roughly half a month's interest on the full $10,000 balance. You keep that interest. For the second half of the month, you earn interest only on the remaining $5,000. A bank that compounds monthly will calculate your interest based on your balance on the last day of the month, so you would earn interest only on the $5,000 you had left.

This is one reason online banks with daily compounding are slightly better for people who move money in and out frequently — you earn interest on the full balance for every day you hold it, rather than losing interest for an entire month because you withdrew money on day 15.

How inflation affects what your interest earnings are actually worth

Interest earnings lose value when inflation rises. If your savings account earns 4.5% APY but inflation is running at 3.5% per year, your money is only growing in real purchasing power by about 1% per year. If inflation is 5% and your account earns 4.5%, you are actually losing purchasing power — your money buys less next year than it does today, even though the dollar amount in your account went up.

This matters most when you are deciding where to keep money you plan to use in the future. A high-yield savings account earning 4.5% is a reasonable place to keep an emergency fund or money you plan to spend within a year or two. If you are saving for something 10 or 20 years away, the interest you earn in a savings account might not keep pace with inflation over that long period, and you might want to consider other options.

You cannot control inflation, but you can control which account you choose. Comparing rates across banks takes 10 minutes and can mean hundreds of dollars per year in additional earnings on the same balance. Checking your rate once or twice per year to see whether it has dropped below the market average takes even less time and often leads to switching to a bank paying more.

The difference between savings accounts, money market accounts, and certificates of deposit

Savings accounts, money market accounts, and certificates of deposit (CDs) all earn interest, but they work differently. A savings account lets you deposit and withdraw money whenever you want, with no penalty. A money market account is similar but usually requires a higher minimum balance and may limit how many withdrawals you can make per month. A CD locks your money away for a set period — three months, six months, one year, or longer — and pays you a fixed interest rate for that entire period.

CDs typically pay higher interest rates than savings accounts because the bank knows your money will stay there. If you withdraw from a CD before the maturity date, you pay a penalty that eats into your earnings. Money market accounts sometimes pay rates between savings accounts and CDs, but the higher rate often comes with restrictions on access that make them less practical for emergency funds.

For most people, a high-yield savings account is the right choice for money you might need within a few years. The rate is competitive, you can access your money without penalty, and the FDIC insures it fully. CDs make sense only if you are certain you will not need the money before the maturity date and you want to lock in a rate you believe is good.

How to find the current best rates and compare accounts

The best way to find current rates is to visit bank websites directly and note the APY they display for savings accounts. Online banks like Marcus, Ally, American Express Personal Savings, and Discover typically show their rates on the homepage. Traditional banks show their rates on the savings account product page, usually buried deeper in the site. Comparing five to ten banks takes 15 minutes and often reveals a 3% to 4% difference in rates.

When you compare, look for the APY, not the interest rate — APY includes the effect of compounding and tells you the true annual return. Check whether the rate applies to all balances or only balances above a certain threshold. Some banks pay higher rates on balances over $100,000 and lower rates on smaller amounts. Confirm that the account is FDIC insured and that there are no monthly fees.

After you open an account, set a reminder to check the rate every three to six months. If your bank's rate drops below the market average by more than 0.5%, it is usually worth switching. The process takes a few days — you open a new account, transfer your balance, and close the old one. You do not lose any interest you have already earned, and the new bank often credits you with a small bonus for opening an account.

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 FDIC insures balances up to $250,000. You can only lose purchasing power if inflation rises faster than your interest rate, but the dollar amount in your account will never decrease unless you withdraw it yourself.

Do I have to pay taxes on savings account interest?

Yes, interest earnings are taxable income. Your bank will send you a Form 1099-INT at the end of the year if you earned $10 or more in interest. You report this amount on your tax return. The tax rate depends on your overall income and tax bracket.

What happens to my interest if the bank fails?

The FDIC protects your account balance and all interest you have earned up to $250,000 total. If the bank fails, the FDIC transfers your account to another bank or pays you directly. Your interest earnings are protected the same way your principal is.

Is it better to keep money in a savings account or under my mattress?

A savings account is better because you earn interest and your money is insured. Keeping cash at home earns nothing and is not protected if there is a fire or theft. Even at 0.01% APY, a savings account is better than zero.

How often does interest get added to my account?

Interest is calculated daily at most online banks but credited monthly or quarterly. This means the bank is earning you interest every day, but you do not see it in your balance until the end of the month or quarter. Some banks credit interest daily, which is slightly better but rare.