What you earn depends on the bank's rate and how much you have saved

The amount of interest you earn on a savings account is determined by two things: the annual percentage yield (APY) the bank offers, and the balance you keep in the account. A bank offering 4.50% APY on $10,000 will pay you roughly $450 per year. The same rate on $1,000 pays roughly $45 per year. The bank calculates this daily or monthly and deposits the interest into your account automatically.

The catch is that APY rates change. Banks raise them when the Federal Reserve raises its benchmark rate, and lower them when the Fed cuts rates. A savings account that paid 0.01% APY in 2021 might pay 4.50% in 2024, then drop to 2.75% in 2025. You do not lock in a rate — it floats with the market. This means the interest you earn this month might be different from what you earn next month.

Online banks and credit unions typically offer higher rates than brick-and-mortar banks. As of late 2024, online savings accounts ranged from roughly 4.00% to 5.35% APY, while traditional bank savings accounts often paid 0.01% to 0.05%. The difference matters: $10,000 earning 0.01% makes $1 per year, while $10,000 at 5.00% makes $500 per year. That gap widens the longer your money sits there.

Key Takeaways

  • Interest earned equals the APY rate multiplied by your account balance, calculated daily or monthly and paid automatically.
  • APY rates are not fixed — they rise and fall with the Federal Reserve's benchmark rate, so your earnings change month to month.
  • Online banks and credit unions typically pay 4.00% to 5.35% APY, while traditional banks often pay under 0.10% APY on the same type of account.
  • The difference between a 0.01% account and a 5.00% account on $10,000 is roughly $500 per year in lost earnings.
  • Interest compounds when the bank adds your earned interest back into the account, so you earn interest on your interest.

How banks calculate the interest you receive

Banks use a formula: your balance multiplied by the APY, divided by 365 days (or 360, depending on the bank's method). If you have $5,000 in an account paying 4.50% APY, the bank calculates roughly $5.48 in interest per day. Most banks compound this daily, meaning they add that day's interest to your balance before calculating the next day's interest. Over a year, daily compounding adds up to slightly more than straightforward multiplication would suggest.

You do not have to do this math yourself. Your bank statement or online dashboard shows your current APY and the interest posted each month. Some banks show a running total of interest earned year-to-date. If the number seems wrong, contact the bank — errors happen, though they are uncommon.

The timing of deposits and withdrawals affects how much you earn. If you deposit $10,000 on the 15th of the month, you earn interest only on that $10,000 from the 15th onward, not for the whole month. If you withdraw $5,000 on the 20th, your balance drops and so does the interest earned for the rest of that month. Banks calculate based on your actual daily balance, not an average.

Why rates vary so much between banks

Banks set their own APY rates within limits set by the Federal Reserve. A bank's overhead costs, deposit volume, and lending strategy all influence what rate they offer. Online banks have lower overhead than branches with tellers and physical locations, so they can afford to pay depositors more. Credit unions are member-owned nonprofits, so they often pass higher rates back to members rather than keeping profits.

Traditional banks sometimes offer lower rates because they rely on customer loyalty, convenience, or bundled services. You might accept 0.05% APY at your local bank because you also have a checking account there and use their ATM network. Online banks compete purely on rate, so they must offer more to attract deposits.

Rates also vary by account type. A money market account might pay slightly more than a basic savings account at the same bank. A certificate of deposit (CD) locks your money away for a set term — three months, one year, five years — and typically pays more than a savings account because the bank knows it can use that money for longer. A high-yield savings account is straightforward a savings account at an online bank or credit union that pays a competitive rate.

What happens to your interest if rates drop

When the Federal Reserve lowers its benchmark rate, banks lower their savings account APY within days or weeks. Your balance does not shrink, but the interest you earn going forward drops. If you were earning $50 per month at 5.00% APY and the rate falls to 3.00% APY, you earn roughly $30 per month on the same balance.

This is why some people move money between banks when rates change. If your current bank drops from 4.50% to 2.00% APY, you might transfer to a bank still offering 4.50%. There is no penalty for moving savings between banks — you straightforward request a transfer, and the money moves in a few business days. Your old account closes, and you start earning the new rate when ready.

Rates can also rise. When the Federal Reserve raises its benchmark rate, banks raise their savings account APY to compete for deposits. If you have been earning 0.05% at a traditional bank and rates rise to 4.50%, your bank might raise your rate to 0.10% — still far below what online banks offer. You are not locked in; you can move to a higher-paying bank anytime.

The difference between savings accounts and other places to keep money

A savings account is one of several places to store money and earn interest. A money market account works like a savings account but usually pays slightly more and may require a higher minimum balance. A certificate of deposit (CD) locks your money for a set period — typically three months to five years — and pays a fixed rate that does not change. You cannot withdraw early without a penalty, but the rate is may provide.

A money market fund is different from a money market account. It is an investment product, not a bank account, and is not insured by the Federal Deposit Insurance Corporation (FDIC). A regular savings account at a bank is FDIC-insured up to $250,000, meaning if the bank fails, your money is protected. Money market funds have no such protection.

A checking account typically pays little to no interest, even at online banks. The tradeoff is that you can write checks and use a debit card. If you want to earn interest and keep your money accessible, a savings account is the standard choice. If you want a may provide rate and do not need the money for a set period, a CD might make sense.

How to find the best rate for your situation

Start by listing what you need: Do you want to access your money anytime, or can you lock it away for months or years? Do you have a large balance or a small one? Some banks offer higher rates only on balances above $25,000. Do you want to stay with your current bank for convenience, or are you willing to switch for a better rate?

Once you know what you need, compare rates across online banks, credit unions, and traditional banks. Websites like Bankrate, DepositAccounts, and the Federal Deposit Insurance Corporation's own rate comparison tool list current APY rates. Rates change frequently, so check again before you move money. A bank offering 5.35% today might drop to 4.50% next month.

Read the fine print for minimum balance requirements, monthly fees, and withdrawal limits. Some high-yield savings accounts require $25,000 to open. Some charge a monthly fee if your balance drops below a threshold. Some limit you to six withdrawals per month (though this rule has loosened in recent years). The highest rate means nothing if you pay $10 per month in fees.

Frequently Asked Questions

Does interest compound monthly or daily?

Most banks compound daily, meaning they add interest to your balance every day and then calculate the next day's interest on the new, higher balance. Some compound monthly. Daily compounding pays slightly more over time. Your bank's website or account agreement states which method they use.

Can I lose money in a savings account?

No. Your balance can only stay the same or grow. Interest is added, never subtracted. If the bank lowers its APY rate, you earn less interest going forward, but your existing balance remains untouched. FDIC insurance protects up to $250,000 if the bank fails.

What if I withdraw money before the end of the month?

You still earn interest on the money you had in the account. If you deposit $5,000 on the 1st and withdraw $2,000 on the 15th, you earn interest on $5,000 for 14 days and on $3,000 for the remaining days of the month. Banks calculate based on your actual daily balance.

Is there a limit to how much interest I can earn?

No limit exists on interest earned. The more money you have and the higher the APY, the more you earn. However, FDIC insurance covers only up to $250,000 per account at one bank. If you have more than $250,000, consider splitting it across multiple banks or account types to keep it all insured.

Should I move my money if rates drop?

It depends on the size of the drop and your balance. If your bank drops from 4.50% to 2.00% and you have $50,000, you lose roughly $1,250 per year. Moving to a bank at 4.50% takes a few business days and costs nothing. If the drop is small and your balance is modest, the hassle might not be worth it.