The interest you earn depends on the account's APY, how much money you keep in it, and how long it sits there
A savings account pays you a percentage of your balance each month or year. That percentage is called the APY (annual percentage yield). If your account has a 4.5% APY and you keep $1,000 in it for a full year without touching it, you'll earn about $45. If you keep $10,000 in the same account for the same year, you'll earn about $450.
The catch is that APY rates change. Banks set their own rates, and they change them based on what the Federal Reserve does with interest rates. A savings account that paid 0.01% APY in 2021 might pay 4.5% or 5% in 2024. This means the interest you earn can shift month to month, and you need to check your bank's current rate rather than assume it stays the same.
Most banks also compound interest, which means they add the interest you've earned back into your account, and then you earn interest on that interest too. This happens monthly at most banks. The more often interest compounds, the slightly more you earn — but the difference is usually small unless you have a large balance.
Key Takeaways
- Your earnings equal your balance multiplied by the APY divided by 12 (for monthly earnings), so a $5,000 balance at 4% APY earns roughly $16.67 per month.
- APY rates vary by bank and change frequently, so the rate you see today may not be the rate you earn next month.
- Online banks typically offer higher APY than brick-and-mortar banks because they have lower overhead costs.
- Interest compounds monthly at most banks, meaning you earn a small amount of interest on the interest you've already earned.
- You only earn interest on money that stays in the account; withdrawals reduce your balance and the interest you'll make that month.
How to calculate what you'll earn
The basic formula is straightforward: take your account balance, multiply it by the APY, and divide by 12 to get your monthly earnings. If you have $2,000 in an account with 4.5% APY, you earn roughly $7.50 per month ($2,000 × 0.045 ÷ 12 = $7.50).
This math assumes your balance stays the same all month. If you add money or withdraw money partway through the month, the bank calculates interest based on the daily balance — how much was in the account each day. Most banks average your daily balance across the month, then explore the APY to that average.
You can also use an online savings calculator by typing in your balance and the APY. Most banks have one on their website. These calculators account for compounding and daily balance changes, so they give you a more accurate picture than the straightforward formula.
Why rates differ so much between banks
Online banks pay more interest than traditional banks because they don't have the cost of physical branches, tellers, or as much staff. Those savings get passed to customers as higher APY. A brick-and-mortar bank might offer 0.01% APY while an online bank offers 4.5% on the exact same type of account.
Credit unions sometimes offer competitive rates too, especially if you're a member. They're nonprofit institutions, so they return profits to members rather than shareholders. Some credit unions pay higher APY on savings accounts than banks do, though not all.
Banks also use interest rates as a tool to attract new customers. You might see a promotional rate that's higher than the standard rate, but it usually only lasts for a set period — often three to six months. After that, the rate drops to the regular APY. Always read the fine print to see when a promotional rate ends.
What happens to your interest when rates change
When the Federal Reserve raises or lowers its benchmark interest rate, banks adjust their savings account APY within days or weeks. If rates go up, your APY goes up and you earn more. If rates go down, your APY goes down and you earn less. This is normal and happens to everyone with a savings account.
Your existing balance doesn't disappear when rates drop — you just earn less interest going forward. If you had $5,000 earning 5% APY and the rate drops to 4%, you still have your $5,000, but next month's interest will be smaller.
Some banks offer a "rate may provide" for a limited time, meaning they promise not to lower your rate for a certain number of months. These are rare and usually only appear on promotional accounts. If you see one, check how long the may provide lasts and what happens when it ends.
Money market accounts and CDs pay differently
A money market account is a hybrid between a savings account and a checking account. It usually pays higher interest than a regular savings account, but it may require a larger minimum balance and limits how many withdrawals you can make per month. The interest works the same way — it's based on APY and compounds monthly.
A certificate of deposit (CD) is different. You agree to leave your money in the account for a set period — three months, six months, one year, or longer. In exchange, the bank pays you a higher APY than a savings account. If you withdraw the money before the term ends, you pay a penalty, usually a few months' worth of interest. CDs are useful if you know you won't need the money for a while and want a may provide rate.
How to find the best rate for your situation
Start by checking what your current bank is paying. Log into your account online or call and ask for the current APY on savings accounts. Write it down. Then visit the websites of three to five online banks — Ally, Marcus, Discover, and others — and note their current rates. Most show the APY right on the homepage without requiring you to open an account.
Compare not just the rate but also the minimum balance required, any monthly fees, and how straightforward it is to move money in and out. Some banks require $25,000 to open a savings account; others take $1. Some charge a monthly fee if your balance drops below a certain amount; others don't. A slightly higher rate doesn't help if you have to pay fees or meet a balance you can't maintain.
If you're moving money from one bank to another, ask the new bank about their transfer process. Most can pull money directly from your old bank account, which takes one to three business days. You don't have to close your old account — you can keep it open and move money gradually if you prefer.
The difference between APY and APR
APY (annual percentage yield) includes the effect of compounding — it's the real return you'll earn. APR (annual percentage rate) does not include compounding. For savings accounts, you'll always see APY because it's the honest number. APR is used for loans and credit cards.
If a bank shows you both numbers on a savings account, use the APY. That's what you'll actually earn. The difference between APY and APR is usually small on savings accounts — often less than 0.1% — but on larger balances or longer time periods, it adds up.
Frequently Asked Questions
Do I have to pay taxes on savings account interest?
Yes. Interest is considered income by the IRS. At the end of the year, your bank sends you a 1099-INT form showing how much interest you earned. You report this on your tax return. If you earned less than $10 in interest, the bank may not send a form, but you still owe tax on it if you're required to file a return.
What's the highest APY I can find right now?
Rates change constantly based on what the Federal Reserve does. Online banks currently offer rates between 4% and 5.5% APY on savings accounts, but this varies by bank and changes weekly. Check the websites of several online banks to see current rates rather than relying on any single number.
Can I move my money to a higher-rate bank without losing interest?
Yes. Interest is calculated daily, so you earn interest up until the day you withdraw. When you move to a new bank, you start earning interest at the new rate when ready. There's no penalty for switching banks with a savings account, unlike with a CD.
What if I add money to my savings account partway through the month?
The bank calculates interest based on your daily balance. Money you deposit partway through the month earns interest starting the day it's deposited, but only for the remaining days of that month. You'll earn the full APY on that money starting the next month.
Is there a limit to how much interest I can earn?
No. The more money you keep in the account, the more interest you earn. There's no cap on savings account interest. However, the FDIC insures up to $250,000 per account, so if you have more than that, consider splitting it across multiple banks for full protection.