The amount you earn depends on three things: how much you deposit, what the APY is, and how long the money sits there

Your savings account interest is calculated by multiplying your balance by the annual percentage yield (APY), then dividing by the number of days in a year. If you have $10,000 in an account with a 4.5% APY, you earn roughly $450 per year — but that's only if the balance stays at $10,000 for the full 12 months. Most banks calculate interest daily and deposit it monthly, so your balance grows slightly each month as interest is added.

The real number you earn depends on when you deposit money, when you withdraw it, and whether the APY changes during the year. A $10,000 deposit for six months at 4.5% APY earns about $225. The same deposit for three months earns about $112. Banks vary in how they handle deposits made mid-month — some count the full month, others count from the deposit date forward.

Current APY rates for savings accounts range widely. High-yield savings accounts at online banks often offer 4% to 5.35% APY, while traditional brick-and-mortar banks typically offer 0.01% to 0.5% APY. The difference between these rates is enormous: $10,000 at 0.01% APY earns $1 per year, while $10,000 at 4.5% APY earns $450. APY rates change frequently and are not locked in — your rate can drop if the bank lowers it, though it can also rise if rates move up.

Key Takeaways

  • Interest earned equals your balance multiplied by the APY, divided by 365 days — so a $5,000 balance at 4% APY earns about $200 per year.
  • Most banks calculate interest daily but pay it monthly, meaning your balance grows each month as interest deposits into your account.
  • High-yield savings accounts at online banks currently pay 4% to 5.35% APY, while traditional banks pay closer to 0.01% to 0.5% APY.
  • APY rates are not fixed and can change at any time, so the interest you earn this month may differ from next month if the bank adjusts its rate.
  • Money deposited mid-month may earn a partial month of interest depending on the bank's rules, so timing matters for smaller deposits.

How banks calculate the interest you earn

Banks use a standard formula: Daily Balance × APY ÷ 365 = Annual Interest. If your balance is $20,000 and the APY is 4.5%, the math is $20,000 × 0.045 ÷ 365 = $2.47 per day. That daily amount is added to your account each day, though you don't see it until the bank deposits the full month's interest at the end of the month.

This daily compounding means your balance grows slightly each day. After the first month, your balance is no longer exactly $20,000 — it's $20,000 plus one month of interest. The next month, you earn interest on that slightly larger balance. Over a year, this compounding effect adds up, though the difference is small at current rates.

Some banks use a different method called average daily balance, where they add up your balance for each day of the month and divide by the number of days. This matters if your balance fluctuates — a deposit early in the month earns interest for more days than a deposit late in the month. Most online banks disclose their method in the account terms, usually buried in the fine print.

Why the same deposit earns different amounts at different banks

A $50,000 deposit earns $2,250 per year at a 4.5% APY bank, but only $250 per year at a 0.5% APY bank. That $2,000 difference happens because of the APY rate alone — the deposit amount and time period are identical. This is why comparing APY rates before opening an account matters: the difference between a 4% bank and a 5% bank is $500 per year on a $50,000 balance.

Banks set their own APY rates based on what the Federal Reserve does, but they don't all move at the same time or by the same amount. When the Fed raises rates, high-yield online banks usually raise their rates within days. Traditional banks often lag by weeks or months, or raise rates by smaller amounts. When the Fed cuts rates, online banks drop theirs quickly, but traditional banks sometimes hold their rates steady for a while.

The bank's business model also affects the rate. Online banks have lower overhead costs than physical branches, so they can afford to pay higher APY. Banks that are trying to attract new customers sometimes offer promotional rates that are higher than their standard rate for a limited time — usually 3 to 12 months. After the promotional period ends, the rate drops to the standard rate.

What happens to your interest if you withdraw money early

If you withdraw money before the end of the month, you still earn interest for the days the money was in the account. A $10,000 deposit on the 1st of the month that you withdraw on the 15th earns interest for 15 days, not the full month. Using the daily calculation method, that's roughly half a month's interest.

Savings accounts have no penalty for withdrawals — you can take money out anytime without losing the interest you've already earned. This is different from certificates of deposit (CDs), which charge a penalty if you withdraw before the maturity date. With a savings account, the only risk is that you earn less interest if you don't keep the money deposited for the full year.

How to estimate your earnings before you open an account

Use this straightforward formula: (Your Deposit × APY) ÷ 12 = Monthly Interest. For a $25,000 deposit at 4.5% APY, that's ($25,000 × 0.045) ÷ 12 = $93.75 per month. Over a year, that's $1,125. If you only keep the money there for six months, divide by 2 instead of 12: $562.50.

This formula assumes the APY stays the same for the full period, which is not may provide. If the bank lowers the rate after three months, your earnings for months 4 through 12 will be lower. If the rate rises, your earnings will be higher. Most banks show you the current APY on their website, but they don't promise it will stay that way.

For accounts where you make regular deposits — adding $500 per month, for example — the calculation is more complex because each deposit earns interest for a different length of time. Your first $500 deposit earns interest for 12 months, your second for 11 months, and so on. A rough estimate is to calculate interest on the average balance you expect to have over the year.

The difference between APY and APR in savings accounts

APY (annual percentage yield) includes the effect of compounding — interest earned on interest. APR (annual percentage rate) does not. For savings accounts, banks are required to show you the APY, not the APR, because APY is the more accurate number for what you actually earn. APR is used for loans and credit cards, where you pay interest instead of earning it.

On a savings account, APY is always slightly higher than APR because of compounding, though the difference is small at current rates. At a 4.5% APY, the APR is about 4.39%. The higher the rate and the more frequently interest compounds, the bigger the gap between APY and APR. This is why banks advertise APY for savings accounts — it's the bigger, more attractive number.

Frequently Asked Questions

Do I earn interest on interest in a savings account?

Yes. When the bank deposits your monthly interest into the account, that interest becomes part of your balance. The next month, you earn interest on the original balance plus the interest from the previous month. This is called compounding. The effect is small — on a $10,000 balance at 4.5% APY, compounding adds about $2 per year — but it does happen.

What if I deposit money multiple times during the month?

Each deposit earns interest from the day it's deposited forward. A $5,000 deposit on the 1st of the month earns interest for the full month. A $5,000 deposit on the 20th earns interest for only 11 days. The bank calculates interest on each day's balance separately, so multiple deposits are handled automatically.

Can a bank lower my APY after I open the account?

Yes. Banks can change APY rates at any time without notice, though most notify customers by email or mail. Your existing balance is not protected at the old rate — it when ready earns interest at the new rate. This is why high-yield savings accounts sometimes drop their rates after a promotional period ends.

Is the interest I earn taxable?

Yes. Interest earned in a savings account is considered income and is taxable. Banks 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. This is separate from the interest calculation — it doesn't affect how much you earn, only how much you owe in taxes.

How often do banks change their APY rates?

Online banks often change rates weekly or monthly, especially when the Federal Reserve changes its rates. Traditional banks change less frequently. There's no set schedule — banks adjust whenever they decide to. You can check your bank's website or call to see the current rate, which may be different from the rate you opened the account with.