What you earn depends on the bank's rate and how much you have saved
The amount of interest you earn in a savings account is the product of three things: the annual percentage yield (APY) the bank offers, how much money sits in the account, and how long it stays there. A bank offering 4.5% APY on $10,000 will pay you roughly $450 over a year—but only if the rate stays the same and you don't withdraw the money. The actual dollar amount varies by institution, by account type, and by the current interest rate environment, which changes constantly.
Interest compounds, meaning you earn interest on your interest. With daily compounding—the standard for most savings accounts—the bank calculates what you owe you each day based on your balance that day, then adds it to your account. Over a year, this compounds into slightly more than a straightforward calculation would suggest, but the difference is usually small for savings accounts. A $10,000 balance at 4.5% APY compounds to about $10,460 after one year, not $10,450, because of daily compounding.
Key Takeaways
- Your interest earnings equal the APY rate multiplied by your balance, compounded daily in most savings accounts.
- A $10,000 balance at 4.5% APY earns roughly $450 per year, though the exact amount depends on how many days the money stays in the account.
- Banks set their own APY rates, so the same $10,000 earns different amounts at different institutions—currently ranging from under 0.01% at some large banks to over 5% at online banks.
- Interest rates change frequently, so a rate you see today may be lower or higher in three months.
- Withdrawals reduce your balance and therefore reduce the interest you earn that month.
How the calculation actually works
Banks calculate interest daily using this formula: your account balance multiplied by the APY, divided by 365 days. That daily amount is added to your account each day. Over a month or year, these daily additions compound into your total earnings.
If you have $10,000 at 4.5% APY, the bank calculates $10,000 × 0.045 ÷ 365 = $1.23 per day. After 30 days, you've earned roughly $37 (though slightly more because of compounding). After 365 days, you've earned roughly $460. The exact figure depends on whether the bank compounds daily, monthly, or quarterly—daily is most common and yields the most interest, but the difference is usually a few dollars per year on typical balances.
If you withdraw $5,000 on day 180, your balance drops and so does your daily interest. For the remaining 185 days, you earn interest only on the remaining $5,000, not the original $10,000. This is why savings accounts reward you for keeping money in them: larger balances and longer holding periods mean more interest.
Why rates vary so much between banks
Banks set their own APY rates based on what they need to attract deposits and what they can earn by lending that money out. A large national bank like Chase or Bank of America typically offers 0.01% to 0.05% APY on savings accounts, meaning $10,000 earns $1 to $5 per year. An online bank like Marcus, Ally, or Wealthfront typically offers 4% to 5.35% APY on the same $10,000, earning $400 to $535 per year.
The difference is real money. Over five years, $10,000 at 0.01% grows to $10,000.50. The same $10,000 at 4.5% grows to $12,462. Online banks can offer higher rates because they have lower overhead—no physical branches, fewer employees—and they pass those savings to depositors in the form of higher interest rates. Large banks offer lower rates because they rely on brand recognition and convenience rather than competitive interest to attract deposits.
These rates change frequently, sometimes weekly. When the Federal Reserve raises its benchmark interest rate, banks typically raise their savings account APY within days or weeks. When the Fed cuts rates, banks usually cut their APY as well, though sometimes more slowly. A rate you see advertised today may be 0.5% lower in six months.
What happens with different balance sizes
Interest earnings scale directly with your balance. Double your balance, double your interest. The APY rate itself does not change based on how much you have—a $1,000 balance and a $100,000 balance at the same bank earn the same APY. But the dollar amount you earn is very different.
| Balance | At 0.05% APY (large bank) | At 4.5% APY (online bank) |
|---|---|---|
| $1,000 | $0.50 per year | $45 per year |
| $10,000 | $5 per year | $450 per year |
| $50,000 | $25 per year | $2,250 per year |
| $100,000 | $50 per year | $4,500 per year |
Some banks offer tiered rates, where you earn a higher APY if your balance exceeds a certain threshold—for example, 4.0% on balances under $25,000 and 4.5% on balances above $25,000. These are less common than they used to be, but they exist. Check the terms of any account you're considering to see whether your balance size affects your rate.
How long your money needs to stay in the account
Savings accounts have no minimum holding period. You can deposit money and withdraw it the next day without penalty. The interest you earn is based on how many days the money actually sits in the account. If you deposit $10,000 on January 1 and withdraw it on January 15, you earn interest for 14 days, not 365.
This matters if you're comparing savings accounts to certificates of deposit (CDs), which lock your money away for a set term—usually three months to five years—in exchange for a higher rate. A CD might offer 5.0% APY, but you cannot touch the money without paying an early withdrawal penalty. A savings account might offer 4.5% APY, but you can withdraw whenever you need to. The choice depends on whether you need the money soon.
The effect of inflation on what your interest actually buys
Interest earnings are real money, but inflation erodes their purchasing power. If you earn 4.5% interest but inflation is running at 3.5%, your money is only growing in real terms at about 1% per year. If you earn 0.05% interest and inflation is 3.5%, you're actually losing purchasing power—your money buys less next year than it does today, even though the account balance went up slightly.
This is why the difference between a 0.05% savings account and a 4.5% savings account matters beyond the raw dollar amount. At 0.05%, you're barely keeping pace with inflation. At 4.5%, you're building real wealth. Over ten years, $10,000 at 0.05% becomes $10,050 in nominal terms but buys significantly less due to inflation. The same $10,000 at 4.5% becomes $15,530, which is real growth even after inflation.
Frequently Asked Questions
Do I pay taxes on savings account interest?
Yes. Interest earned in a savings account is taxable income. Banks report interest of $10 or more to the IRS on a 1099-INT form, and you report it on your tax return. The tax rate depends on your overall income and tax bracket. This is why the after-tax return matters: if you earn $450 in interest and pay 24% in taxes, you keep $342.
Can a bank lower my interest rate after I open the account?
Yes. Banks can change savings account rates at any time without notice. This is different from a CD, where the rate is locked in for the term. If rates drop, your bank may lower your APY. If rates rise, your bank may not raise yours as quickly as competitors do. This is why it makes sense to shop around periodically—you might find a better rate elsewhere.
What's the difference between APY and APR?
APY (annual percentage yield) includes the effect of compounding and is what you actually earn. APR (annual percentage rate) does not include compounding. For savings accounts, always look at the APY, not the APR. Banks are required to display APY prominently, so you should see it clearly on any account page.
Is there a maximum amount of interest I can earn?
No. There is no limit on how much interest you can earn in a savings account. However, the FDIC insures deposits up to $250,000 per account holder per bank, so if you have more than that, you should spread it across multiple banks or account types to keep all of it insured.
Do I earn interest on money I just deposited?
Yes, but only starting the day after deposit at most banks. Some banks begin accruing interest the day of deposit. Check the account terms to see when interest accrual begins. The difference is usually a few cents, but it matters if you're moving large sums.