What you earn depends on the bank, the account type, and how much you have saved

The amount of interest a savings account pays you is called the Annual Percentage Yield, or APY. Right now, savings accounts at different banks pay anywhere from nearly 0% to around 5% APY, depending on where you bank and what type of account you open. A bank with a physical branch on your street might pay 0.01% APY, while an online-only bank might pay 4.5% APY on the same amount of money. The difference matters: on $10,000, one bank might pay you $1 per year while another pays $450.

The APY you see advertised is what the bank promises to pay if you leave your money untouched for a full year. Some accounts pay a higher rate if you keep a larger balance, and some rates change when the Federal Reserve raises or lowers interest rates. Banks set their own rates based on what they need to attract customers and what they can afford to pay.

Key Takeaways

  • Online banks typically pay 4% to 5% APY on savings accounts, while traditional banks with branches often pay less than 1%.
  • The APY you see is the yearly rate — if a bank pays 4.5% APY, you earn about 0.375% of your balance each month.
  • Interest rates change over time as the Federal Reserve adjusts its rates, so a rate that is high today may drop in six months.
  • Some accounts require a minimum balance to earn the advertised rate, so check the fine print before opening an account.

Why online banks pay more than branch banks

Online banks have lower costs than banks with physical locations. They don't pay rent on buildings, don't employ tellers, and don't maintain ATM networks. Because their expenses are lower, they can afford to pay you more interest on your savings. A bank like Ally or Marcus has no branches — you do everything online or by phone — and that savings gets passed to you as a higher APY.

A traditional bank like Chase or Bank of America has thousands of branches, which costs money. That cost comes out of what they can pay you. You may choose a branch bank anyway because you like walking in to talk to someone, or because you use their ATM network. That choice is yours to make, but it usually means accepting a lower interest rate.

How interest rates move with the Federal Reserve

The Federal Reserve, which is the central bank of the United States, sets a target interest rate that affects what all banks pay. When the Federal Reserve raises its rate, banks usually raise the APY they pay on savings accounts within weeks or months. When the Federal Reserve lowers its rate, banks lower what they pay you. This happened dramatically in 2022 and 2023: savings account rates jumped from near 0% to 4% or higher as the Federal Reserve raised rates to fight inflation.

This means the rate you see today may not be the rate you earn next year. If you open a savings account at 4.5% APY, that rate might stay the same for months, or it might drop to 3% if the Federal Reserve cuts rates. Banks are not required to lock in a rate — they can change it whenever they want. Check your account statements or log in online to see if your rate has changed.

The difference between regular savings and money market accounts

A money market account is a hybrid between a savings account and a checking account. It usually pays a higher APY than a regular savings account at the same bank, but it also lets you write checks or use a debit card. The catch is that money market accounts often require a larger minimum balance — sometimes $2,500 or more — to earn the advertised rate. If your balance drops below the minimum, the bank may pay you a much lower rate or charge you a monthly fee.

A regular savings account has no minimum balance at many banks, or a very low one like $25. You earn less interest, but you have more flexibility. If you have a large amount saved and won't need to touch it, a money market account might pay you more. If you have a smaller amount or think you might need the money soon, a regular savings account is usually simpler.

How much you actually earn: the math

Banks calculate interest daily but usually pay it monthly. If your account pays 4.8% APY and you have $5,000 in it, you earn about $240 per year, or $20 per month. If the rate is 0.5% APY, you earn about $25 per year, or $2 per month on the same $5,000.

The longer you leave money in the account, the more you earn. This is because of compounding — the bank pays interest on your interest. If you earn $20 in month one, month two you earn interest on $5,020, not just $5,000. The effect is small in a savings account, but it adds up over years. A $10,000 balance at 4.5% APY grows to about $10,460 after one year if you don't touch it.

What to check before opening an account

Look at the APY, but also look at what the bank requires. Some banks advertise a high rate but only pay it if you have $25,000 or more. Others pay the advertised rate on any balance. Read the account details or call the bank and ask: "What is the APY on this account if I have $5,000?" (or whatever amount you plan to deposit). Don't assume the advertised rate applies to you.

Also check whether the rate is fixed or variable. A fixed rate stays the same for a set period — say, six months. A variable rate can change anytime. Most savings accounts are variable, which means the bank can lower your rate whenever it wants. This is normal, but it's worth knowing.

Frequently Asked Questions

Is the interest I earn from a savings account taxed?

Yes. Interest income is taxable as regular income. If you earn $100 in interest during the year, you report that on your tax return. Your bank will send you a form called a 1099-INT if you earn $10 or more in interest. Keep records of what you earn so you can report it accurately.

Can I lose money in a savings account?

No. Your money is insured by the FDIC (Federal Deposit Insurance Corporation) up to $250,000 per account at each bank. The bank can't lose your deposit, and if the bank fails, the FDIC pays you back. You can only lose money if you withdraw it yourself.

Why do some banks pay almost no interest?

Banks set their own rates based on how much they need to attract deposits. A large bank with many customers may not need to offer a high rate because people bank there anyway. A smaller bank or online bank may offer a higher rate to attract new customers. Shop around — you can earn significantly more by switching banks.

If I move my money to a different bank, do I lose the interest I already earned?

No. Interest you've already earned is yours to keep. When you move money to a new bank, you take that balance with you. You only stop earning the old rate once the money leaves the old account. The new bank starts paying its rate on the day the money arrives.

What happens to my savings account interest if the Federal Reserve lowers rates?

Your bank will likely lower the APY it pays you, usually within a few weeks. This doesn't happen automatically — you have to check your account or read your statements to see if the rate changed. If your bank's rate drops too low, you can move your money to a bank paying more.