What you earn depends on the APY, your balance, and how long you keep the money there
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 bank paying 4.5% APY on $10,000 will earn you roughly $450 in a year—but only if the balance stays at $10,000 the whole time. If you withdraw money mid-year or add deposits, the calculation changes. If you move to a bank offering 0.01% APY, that same $10,000 earns about $1 per year.
The difference between banks is real and worth checking before you open an account. Online banks typically offer higher APY than brick-and-mortar banks because they have lower overhead costs. As of early 2024, online savings accounts range from around 4% to 5.35% APY, while traditional banks often sit between 0.01% and 0.5%. That gap means $10,000 earning $400 to $500 per year at an online bank versus $1 to $50 at a traditional bank.
Key Takeaways
- Your earnings equal the APY rate multiplied by your account balance, divided by 12 if you want the monthly amount.
- Banks compound interest daily, weekly, or monthly depending on their terms, which means you earn small amounts of interest on your interest.
- APY rates change over time and vary widely between banks, so comparing rates before opening an account can add hundreds of dollars to your earnings each year.
- Withdrawals and deposits during the year change your total earnings because interest is calculated on the balance you actually held.
- Money market accounts and certificates of deposit sometimes offer higher APY than savings accounts, though they come with different rules about access.
How the math works with a straightforward example
If you have $5,000 in a savings account earning 4.5% APY, you earn roughly $225 per year. That breaks down to about $18.75 per month or $0.62 per day. The bank calculates this by taking your balance, multiplying it by the APY, and dividing by the number of days in a year (365 or 366). Most banks compound interest daily, meaning they calculate what you've earned and add it back to your balance, so the next day's calculation includes that small interest payment.
If you add $1,000 to that account after six months, your earnings for the full year are not $225. Instead, you earn roughly $112.50 on the first $5,000 for six months, plus roughly $135 on the $6,000 for the remaining six months, totaling about $247.50. The timing of deposits and withdrawals matters because the bank only pays interest on money that was actually in the account.
Compounding works in your favor over longer periods. If you leave $5,000 untouched in a 4.5% APY account for five years, you earn more than $1,200 total—not just $225 per year times five, because each year's interest gets added to the balance and earns interest itself. This effect is small in savings accounts but becomes significant over decades or with larger balances.
Why APY rates vary so much between banks
Banks set their own APY rates based on what the Federal Reserve charges them to borrow money, how much competition they face, and what they need to attract deposits. When the Federal Reserve raises its benchmark rate, banks eventually raise their savings APY. When the Fed cuts rates, banks cut their APY—sometimes quickly, sometimes slowly. This means the rate you see today may not be the rate you earn six months from now.
Online banks consistently offer higher rates than traditional banks because they don't operate physical branches. A Chase or Bank of America branch costs money to staff and maintain, so those banks can afford to pay less interest. An online bank like Marcus or Ally has no branches, lower costs, and uses higher interest rates to attract customers. Credit unions sometimes offer competitive rates too, though they vary by institution and may require membership.
Some banks offer promotional rates for new customers—a higher APY for the first few months or on deposits made within a certain window. These rates usually drop to a lower standard rate after the promotion ends. Read the terms carefully to know when the rate changes and what the ongoing rate will be.
How much you earn with different account balances and rates
| Balance | At 0.5% APY | At 2.5% APY | At 4.5% APY | At 5.35% APY |
|---|---|---|---|---|
| $1,000 | $5 | $25 | $45 | $53.50 |
| $5,000 | $25 | $125 | $225 | $267.50 |
| $10,000 | $50 | $250 | $450 | $535 |
| $25,000 | $125 | $625 | $1,125 | $1,337.50 |
| $50,000 | $250 | $1,250 | $2,250 | $2,675 |
These figures show annual earnings before taxes and assume the balance stays constant throughout the year. Your actual earnings will differ if you make deposits or withdrawals. The difference between a 0.5% account and a 5.35% account on a $50,000 balance is $2,425 per year—money that stays in your pocket instead of the bank's.
The table shows why even small differences in APY matter on larger balances. Moving $25,000 from a 0.5% account to a 4.5% account gains you $1,000 per year. Over five years, that difference compounds to more than $5,000 in additional earnings. For people saving for a down payment, emergency fund, or other goal, choosing the right rate is as important as choosing the right bank.
What happens to your interest if you withdraw money early
Savings accounts have no penalty for withdrawals, so you can take money out whenever you need it without losing the interest you've already earned. The interest you've earned up to that point is yours. However, the day you withdraw, your balance drops, and your interest earnings for future months are calculated on the lower balance.
This is different from certificates of deposit (CDs), which do charge a penalty if you withdraw before the CD matures. A CD might offer 5.5% APY, but if you withdraw the money after eight months of a one-year CD, you may lose three months of interest as a penalty. Savings accounts avoid this problem entirely—there is no penalty, but also no may provide rate. The bank can lower the APY at any time, though existing balances usually keep the rate they had when you opened the account, at least for a while.
How taxes affect what you actually keep
Interest earned in a savings account is taxable income. If you earn $450 in interest during a year, that $450 counts as income on your tax return. The bank will send you a 1099-INT form in January showing how much interest you earned. Your tax bracket determines how much of that interest you owe in taxes—someone in the 24% bracket pays roughly $108 in taxes on $450 of interest, leaving them $342 to keep.
This is why the real value of a high-APY account becomes clearer over time. Earning $450 at 4.5% APY and paying $108 in taxes still leaves you $342 ahead of someone earning $50 at 0.5% APY and paying $12 in taxes. The higher rate wins even after taxes. For people with very large balances or in high tax brackets, a tax-advantaged account like a Roth IRA might make sense, though those accounts have contribution limits and rules about when you can withdraw.
Money market accounts and CDs as alternatives
If you want higher interest than a regular savings account, a money market account sometimes offers a slightly higher APY in exchange for a higher minimum balance—often $2,500 to $10,000. Money market accounts work like savings accounts: you can withdraw money whenever you want, but the rate can change. Some money market accounts also come with a debit card or checks, giving you more flexibility than a regular savings account.
A certificate of deposit locks your money away for a set period—three months, six months, one year, five years—and offers a fixed APY for that entire period. A one-year CD might pay 5.5% APY while a savings account pays 4.5%. The tradeoff is that you cannot touch the money without paying a penalty, usually three to six months of interest. CDs make sense if you know you will not need the money for a specific period and want to lock in a rate before it drops.
Frequently Asked Questions
Can I earn interest on interest in a savings account?
Yes. Banks compound interest daily or weekly, meaning they add the small amount of interest you earned to your balance, and the next calculation includes that interest. Over a year or more, this compounding effect adds up, though it is modest in savings accounts. A $10,000 balance at 4.5% APY earns about $460 total over a year when compounded daily, versus $450 if interest were not compounded.
What if the bank lowers the APY after I open my account?
Banks can lower APY at any time without penalty to you. Your money stays in the account earning the new, lower rate. You can move your money to another bank offering a higher rate, but you will not owe any fee for closing the account. Check your bank's website or call to see the current rate on your account type.
Is the interest I earn the same every month?
No. Interest is calculated daily based on your balance that day, so the amount you earn each month depends on what your balance was. A month when you deposit money will earn more interest than a month when you withdraw. The bank adds up all the daily interest and deposits it monthly or daily, depending on the bank's terms.
Do I have to report savings account interest on my taxes?
Yes, if you earned more than $10 in interest during the year. The bank sends you a 1099-INT form, and you report that amount as income. Even if you earned less than $10, you should report it. Interest income is taxable regardless of the amount.
How do I find the bank offering the highest APY right now?
Compare rates on banking websites that track current APY across multiple banks, or visit individual bank websites directly. Rates change frequently, so check a few sources. Online banks almost always offer higher rates than traditional banks. Read the terms to confirm there are no minimum balance requirements or other restrictions that would prevent you from opening the account.