What you earn depends on the account's APY, how much you deposit, and how long the money sits there
The amount of interest a savings account generates is straightforward math: your balance multiplied by the annual percentage yield (APY), divided by 365 days. A $10,000 deposit in an account paying 4.5% APY earns roughly $450 per year, or about $37.50 per month. An account paying 0.01% APY on the same balance earns $1 per year. The difference between these two accounts—$449 per year on the same deposit—is why the APY matters more than the bank's name.
The catch is that interest compounds, usually daily or monthly. That means you earn interest on your interest. With daily compounding at 4.5% APY, your $10,000 grows to $10,461.36 after one year, not $10,450. The difference is small on modest balances but becomes meaningful as your account grows or as you leave money untouched for years.
Most savings accounts today fall into two categories: traditional bank accounts paying between 0.01% and 0.5% APY, and high-yield savings accounts (HYSAs) paying between 4% and 5.35% APY as of early 2024. The gap between them has widened since the Federal Reserve began raising interest rates in 2022. A traditional bank account at a major chain may pay so little that inflation erodes your purchasing power faster than interest builds it.
Key Takeaways
- Interest earned is your account balance multiplied by the APY, with daily compounding making the actual amount slightly higher than straightforward multiplication.
- High-yield savings accounts currently pay 4% to 5.35% APY, while traditional bank accounts often pay 0.01% to 0.5%, a difference of hundreds of dollars per year on the same deposit.
- The APY you see advertised can change at any time, especially when the Federal Reserve adjusts its benchmark rate, so the interest you earn next month may differ from this month.
- Moving money between accounts takes one to three business days, so switching to a higher-yield account costs you a few days of interest but saves you money over months or years.
How compounding changes the total you earn
Compounding means the bank pays interest on the interest you've already earned. With daily compounding, this happens 365 times per year. The difference between straightforward interest and compounded interest is small in the first month but grows over time.
On a $50,000 deposit at 4.5% APY with daily compounding, you earn $2,296.89 in the first year. Without compounding (straightforward interest), you would earn exactly $2,250. That extra $46.89 comes from earning interest on the interest that accumulated each day. After five years, the gap widens: compounding produces $12,079.29 in total interest versus $11,250 with straightforward interest—a difference of $829.29 on the same deposit.
The longer your money sits in the account, the more compounding works in your favor. This is why moving money to a higher-yield account makes sense even if you plan to leave it untouched for years. A 4% difference in APY on $50,000 over five years is roughly $10,000 in additional interest.
Why APY changes and what that means for your earnings
The APY your account pays is not fixed. Banks adjust rates based on what the Federal Reserve does with its benchmark interest rate. When the Fed raises rates, banks typically raise savings account APYs within days or weeks. When the Fed cuts rates, banks often cut savings APYs just as quickly, sometimes faster.
From March 2022 to July 2023, the Federal Reserve raised its benchmark rate 11 times. During that period, high-yield savings accounts went from paying around 0.5% APY to over 5% APY. A person who moved $100,000 to an HYSA in early 2022 earned roughly $500 that year; by 2023, the same account was earning over $5,000 per year. The reverse happens when rates fall: if the Fed cuts rates, your interest earnings will drop even if you do nothing.
You cannot predict when or how much the Fed will move rates, but you can monitor your account's APY. Most banks show the current rate on their website. If your rate drops significantly below what other banks are offering, moving your money takes a few days and can recover thousands of dollars in lost interest over the following year.
Comparing earnings across different account types
The type of account you choose determines how much interest you earn more than almost anything else. Here is what different account types typically pay:
| Account Type | Typical APY Range | Annual Interest on $10,000 | Annual Interest on $100,000 |
|---|---|---|---|
| Traditional bank savings | 0.01% to 0.5% | $1 to $50 | $10 to $500 |
| Money market account | 0.5% to 3% | $50 to $300 | $500 to $3,000 |
| High-yield savings account | 4% to 5.35% | $400 to $535 | $4,000 to $5,350 |
| Certificate of Deposit (CD) | 4% to 5.5% (varies by term) | $400 to $550 | $4,000 to $5,500 |
The gap between a traditional savings account and an HYSA is substantial. On $100,000, the difference between 0.1% and 4.5% is $4,400 per year. Over five years, that compounds to roughly $23,000 in additional interest. The trade-off is that HYSAs are usually online-only, so you cannot walk into a branch to withdraw cash, though transfers to a linked checking account take one to three business days.
Certificates of Deposit (CDs) often pay slightly higher rates than HYSAs because your money is locked away for a set term—usually three months to five years. If you withdraw early, you pay a penalty. For money you know you will not need for a specific period, a CD can earn more than an HYSA. For money you might need to access, an HYSA is more flexible.
How inflation affects what your interest earnings are actually worth
Interest earnings only matter if they outpace inflation. Inflation is the rate at which prices rise. If inflation is 3% per year and your savings account pays 2% APY, you are losing purchasing power: your money buys less next year even though the account balance grew.
From 2020 to 2022, inflation rose sharply while savings account rates remained near zero. A person with $100,000 in a 0.01% savings account earned $10 in interest while inflation eroded roughly $8,000 of purchasing power. That person lost money in real terms. Since mid-2023, high-yield savings accounts paying 4% to 5% have outpaced inflation, which has cooled to around 3% to 3.5%. This means money in an HYSA is actually growing in real purchasing power.
Inflation changes over time and is not predictable. The point is not to chase the highest rate but to keep your savings in an account that at least keeps pace with inflation. A 4% APY account does that in most economic environments. A 0.01% account almost never does.
What happens to interest if you withdraw money mid-year
Interest is calculated on your daily balance. If you deposit $10,000 on January 1 and withdraw $5,000 on July 1, you earn interest only on the balance you actually held each day. The bank tracks this automatically; you do not need to do anything.
On a $10,000 deposit at 4.5% APY, you earn roughly $225 in the first six months. If you withdraw $5,000 on July 1, you earn roughly $112.50 on the remaining $5,000 for the second half of the year, for a total of about $337.50. You do not lose the interest you already earned; you straightforward earn less on the smaller balance going forward.
Some accounts charge a fee if you make more than a certain number of withdrawals per month, though federal rules no longer limit this. Check your account's terms before opening it. Most online banks allow unlimited transfers to a linked checking account without penalty.
Frequently Asked Questions
Is the interest I earn taxable?
Yes. Interest earned in a savings account is taxable income. The bank will 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 overall income and tax bracket, but the interest itself is not tax-free.
Can I lose money in a savings account?
No, not from the bank's perspective. Your balance cannot go negative unless you overdraft a linked checking account. However, inflation can reduce your purchasing power. If inflation is 4% and your account pays 1%, you are effectively losing 3% of your money's value each year, even though the account balance stays the same.
What if I move my money to a different bank—do I lose the interest I already earned?
No. Interest is calculated through the day you withdraw the money. When you transfer to another bank, you receive the full balance including all interest earned to date. The transfer itself takes one to three business days, during which your old account continues earning interest at its current rate.
How often is interest added to my account?
Interest compounds daily at most banks, meaning it is calculated every day, but it is usually credited (added to your balance) monthly. Some banks credit it quarterly. The frequency of crediting does not change how much you earn; daily compounding produces the same result whether it is credited monthly or daily.
Will interest rates stay this high?
No one can predict what the Federal Reserve will do. Rates could rise, fall, or stay flat depending on inflation, employment, and economic conditions. If you are earning 4.5% now and rates fall to 2%, your earnings will drop. If you need the money in the next few years, locking in a CD at the current rate protects you from future rate cuts.