What you earn depends on the account type, the bank, and how long you leave the money alone
The amount of interest you earn in a savings account is determined by three things: the annual percentage yield (APY) the bank offers, how much money you have in the account, and how long it stays there. A high-yield savings account at an online bank might currently offer 4.5% APY, while a traditional brick-and-mortar bank might offer 0.01% APY on the same balance. The difference between these two is substantial—on $10,000, you would earn roughly $450 per year at 4.5% versus $1 per year at 0.01%.
Interest compounds, which means you earn interest on your interest. Most savings accounts compound daily or monthly, so your balance grows slightly faster than a straightforward calculation would suggest. However, the compounding effect is small in savings accounts—it matters much more over decades or with very large balances.
Banks change their APY rates frequently, especially when the Federal Reserve adjusts its benchmark rates. If you opened a savings account two years ago, the rate you're earning now is likely different from what you signed up for. You should check your current rate at least once a year and compare it to what other banks are offering.
Key Takeaways
- Online banks typically offer higher APY rates (currently 4% to 5%) than traditional banks (typically under 1%), so the same $10,000 earns $400 to $500 more per year at an online bank.
- Interest compounds daily or monthly depending on the bank, so your balance grows slightly faster than the stated APY alone would suggest.
- Banks lower their rates when the Federal Reserve cuts rates, so a rate you locked in last year may be significantly lower today.
- Money market accounts and certificates of deposit (CDs) sometimes offer higher rates than savings accounts, but they come with different withdrawal rules or time commitments.
How to calculate what you'll earn
The basic formula is straightforward: multiply your balance by the APY, then divide by 12 for a monthly estimate. If you have $5,000 in an account earning 4.5% APY, you earn roughly $187.50 per year, or about $15.63 per month. This assumes you don't add or withdraw money during that time.
Most banks show you the interest you've earned so far in your account statement or online dashboard. This is the easiest way to see what you're actually getting, because it accounts for the exact compounding schedule your bank uses and any rate changes that happened during the period.
If you're comparing accounts before opening one, use the APY figure the bank publishes, not the interest rate. APY includes the effect of compounding, so it's the true number that matters. A bank might advertise an interest rate of 4.45% but an APY of 4.55%—the APY is what you'll actually earn.
Why online banks pay more than traditional banks
Online banks have lower overhead costs than banks with physical branches. They don't pay for building leases, tellers, or branch managers. Because they save money on operations, they pass some of that savings to customers in the form of higher interest rates. This is why an online bank might offer 4.5% APY while a traditional bank offers 0.5% APY on the same type of account.
The trade-off is convenience. With an online bank, you can't walk into a branch to deposit cash or speak to someone in person. Most online banks accept mobile check deposits and transfers from other banks, but if you need to deposit large amounts of physical cash regularly, a traditional bank may be more practical despite the lower rate.
Some traditional banks have created online divisions that offer higher rates to compete. If you already have a relationship with a traditional bank, check whether they offer a high-yield savings account online. You might earn a better rate without switching banks entirely.
When rates change and what that means for you
The Federal Reserve sets a target range for the federal funds rate, which influences what banks pay on savings accounts. When the Fed raises rates, banks typically raise their savings account APY within days or weeks. When the Fed cuts rates, banks usually cut their savings account APY quickly as well—sometimes within a day.
This means the rate you earn today is not may provide to stay the same. If you opened a savings account at 5.35% APY in mid-2023, that rate has likely dropped to 4.5% or lower by now, depending on when you're reading this. Banks are not required to notify you before lowering your rate, though they must give you notice before making the change.
If your rate drops significantly, you have options. You can move your money to a bank offering a higher rate, or you can shop around and move it back to your current bank if they match a competitor's offer. There's no penalty for moving money between savings accounts at different banks.
Money market accounts and CDs as alternatives
A money market account is a hybrid between a savings account and a checking account. It typically offers a higher APY than a regular savings account but limits how many withdrawals you can make per month. Some money market accounts also come with a debit card or checkbook. The higher rate compensates you for the withdrawal restrictions.
A certificate of deposit (CD) locks your money away for a set period—usually three months to five years. In exchange, the bank pays you a higher APY than you'd get in a savings account. If you withdraw the money before the CD matures, you pay an early withdrawal penalty, which is typically a few months' worth of interest. CDs make sense if you know you won't need the money for a specific period and want to lock in a rate before rates fall.
Currently, some CDs offer rates higher than savings accounts, but this varies by bank and by CD term. A one-year CD might offer 5.0% APY while a five-year CD offers 4.5% APY, or vice versa. Check what your bank is offering before deciding.
How FDIC insurance affects your strategy
The Federal Deposit Insurance Corporation (FDIC) insures deposits up to $250,000 per depositor, per bank, per account type. This means if you have $250,000 in a savings account at Bank A and the bank fails, you're protected. If you have $300,000, the extra $50,000 is not covered.
If you have more than $250,000 to save, you can open accounts at multiple banks to stay within the insurance limit at each one. For example, you could put $250,000 at an online bank offering 4.5% APY and another $250,000 at a different online bank offering 4.4% APY. Both amounts would be insured, and you'd earn interest on the full balance.
FDIC insurance doesn't affect how much interest you earn, but it does affect how much of your money is protected if something goes wrong. When comparing banks, check that they're FDIC-insured before moving a large balance.
Frequently Asked Questions
Can I earn more interest by keeping money in a savings account longer?
No. A savings account earns interest continuously as long as the money is there. Keeping $5,000 in the account for two years earns twice as much interest as keeping it for one year, but that's because you have the money there twice as long, not because the rate increases. The APY stays the same regardless of how long you keep the account open.
What's the difference between APY and interest rate?
Interest rate is the percentage the bank pays on your balance. APY includes the effect of compounding—earning interest on your interest. A bank might advertise a 4.45% interest rate but a 4.55% APY. The APY is the true number that matters, because it shows what you'll actually earn.
Do I have to pay taxes on savings account interest?
Yes. Interest earned in a savings account is taxable income. Banks send you a 1099-INT form at the end of the year if you earned $10 or more in interest. You report this on your tax return. The amount you owe in taxes depends on your tax bracket and total income.
Should I move my money if my bank lowers its rate?
If your bank's rate drops significantly below what competitors are offering, moving your money can make sense. Switching takes a few days and involves no penalty. However, if the rate difference is small (less than 0.5%), the effort may not be worth it unless you have a large balance.
What happens to my interest if I withdraw money mid-month?
You earn interest only on the balance you actually had in the account. If you had $10,000 for 20 days and $5,000 for 10 days in a month, you earn interest on an average of roughly $8,333 for that month. The exact calculation depends on how your bank compounds interest, but you never lose interest you've already earned.