The amount you earn depends on the APY, your balance, and how long the money sits there

The interest you earn on a savings account is calculated by multiplying your account balance by the annual percentage yield (APY), then dividing by the number of days in a year. If you keep $10,000 in an account with a 4.5% APY for a full year, you earn $450. If you keep it for six months, you earn roughly $225. The bank compounds this interest—meaning you earn interest on your interest—usually daily or monthly, so the actual amount is slightly higher than a straightforward multiplication.

The real variable is the APY itself. A savings account at a large national bank might offer 0.01% APY, while an online bank might offer 4.5% or higher. That same $10,000 earns $1 per year at the first bank and $450 at the second. The difference compounds: over five years, you'd earn $5 versus $2,432. Where you keep your money matters far more than how much you keep.

Banks set their own APY rates based on what the Federal Reserve charges them to borrow money. When the Fed raises rates, banks eventually raise savings rates. When the Fed cuts rates, banks cut savings rates—sometimes quickly, sometimes slowly. Your rate can change at any time unless you have a fixed-rate product like a certificate of deposit (CD).

Key Takeaways

  • Interest earned equals your balance multiplied by the APY, divided by 365 days, then compounded daily or monthly depending on the bank.
  • A 4.5% APY account earns roughly $450 per year on $10,000; a 0.01% account earns $1 per year on the same balance.
  • Banks change savings rates whenever they choose, so the APY you see today may be lower next month.
  • Online banks and credit unions typically offer higher APY than large national banks, though all are FDIC-insured up to $250,000.
  • Money market accounts and high-yield savings accounts use the same interest calculation as regular savings accounts but often pay higher rates.

How the calculation actually works

Banks use a daily balance method to calculate interest. They take your balance at the end of each day, multiply it by the APY, divide by 365, and add that day's interest to your account. Then tomorrow's interest is calculated on the new balance—which includes yesterday's interest. This is compounding, and it means your money grows slightly faster than straightforward math suggests.

Here is a concrete example. You deposit $5,000 in an account with 4.5% APY on January 1. On January 1, the bank calculates: $5,000 × 0.045 ÷ 365 = $0.62 in interest. Your balance is now $5,000.62. On January 2, the calculation is: $5,000.62 × 0.045 ÷ 365 = $0.62 in interest (slightly more because the balance is slightly higher). After 365 days, you have earned $225.56 instead of exactly $225. The difference grows larger with bigger balances and higher rates.

Some banks compound monthly instead of daily. The math is the same principle but happens 12 times a year instead of 365 times. Daily compounding always produces slightly more interest, which is why banks advertising daily compounding are being specific about an advantage.

Why the APY you see today might not be the APY you earn tomorrow

Banks are not required to lock in a savings rate. They can lower it whenever they want, usually with a few days' notice. When the Federal Reserve cut rates in 2023, many banks that had offered 4.5% to 5.0% APY dropped to 4.0% or lower within weeks. Some customers who opened accounts at peak rates saw their earnings cut in half.

The only way to lock in a rate is to use a certificate of deposit (CD). A CD is a product where you agree to leave money untouched for a set period—three months, six months, one year, five years—and the bank guarantees the APY for that entire period. If you open a one-year CD at 4.5% APY, you earn 4.5% for the full year no matter what happens to the market. If you withdraw early, you pay a penalty, usually a few months' worth of interest.

Regular savings accounts have no such may provide. The APY is variable, meaning it can change. Banks typically lower rates slowly to avoid losing customers, but they do lower them. If you want to know whether your rate has changed, check your account statement or log into your online banking portal—the current APY is always listed there.

How different account types affect your earnings

A high-yield savings account uses the exact same interest calculation as a regular savings account, but the APY is higher. Online banks like Marcus, Ally, and American Express offer high-yield savings accounts with rates that track closely to what larger banks offer on CDs. The trade-off is that high-yield accounts usually have no physical branches and require you to manage money online or by phone.

A money market account is a hybrid between a savings account and a checking account. It pays interest like a savings account but lets you write checks or use a debit card like a checking account. The interest calculation is identical to a savings account, but the APY is often slightly higher because the bank can use your money more freely. Money market accounts usually require a higher minimum balance—often $2,500 or more.

A regular checking account earns little to no interest. Most banks pay 0.01% APY or nothing at all on checking accounts, even if you maintain a large balance. Some credit unions and online banks offer checking accounts with higher rates, but these are exceptions. If you are keeping money long-term, a savings or money market account will earn substantially more.

The effect of balance changes during the year

Interest is calculated on your balance each day, so deposits and withdrawals change how much you earn. If you deposit $10,000 on January 1 and leave it untouched, you earn interest on $10,000 for all 365 days. If you deposit $10,000 on July 1, you earn interest on $10,000 for only 184 days, so you earn roughly half as much.

The same applies to withdrawals. If you deposit $10,000 on January 1 and withdraw $5,000 on July 1, you earn interest on $10,000 for 181 days and on $5,000 for 184 days. The bank calculates this automatically—you do not have to do anything. Your statement will show the total interest earned, and you can verify it by checking the APY and the average daily balance.

Some banks list the average daily balance on your statement, which makes it straightforward to understand how much you earned. Others do not. If you want to calculate it yourself, add up your balance at the end of each day and divide by the number of days in the period. Multiply that by the APY and divide by 365.

Why your bank's rate might be lower than advertised rates elsewhere

Large national banks like Chase, Bank of America, and Wells Fargo typically offer savings rates between 0.01% and 0.35% APY, even when online banks are offering 4.0% or higher. This is not a mistake or a hidden fee—it is a business choice. These banks have physical branches, customer service staff, and marketing costs. They can afford to pay lower rates because customers stay for convenience, not for interest earnings.

Online banks have no branches and minimal staff, so they pass the savings to customers in the form of higher APY. Credit unions, which are member-owned rather than shareholder-owned, often offer rates between national banks and online banks. All deposits at FDIC-insured banks and NCUA-insured credit unions are protected up to $250,000, so the safety is the same regardless of where you keep your money.

If you are earning less than 1% APY on a savings account, you are likely at a national bank. Moving your money to an online bank or credit union could increase your earnings by 10 to 50 times without any additional effort or risk. The trade-off is that you lose in-person service and the ability to deposit cash at a branch.

How to compare accounts and estimate your earnings

To compare accounts, look at the APY, the minimum balance required, and any fees. The APY is the only number that matters for interest earnings—ignore the "interest rate" if it is listed separately, because APY includes compounding and is the real number you will earn.

To estimate your earnings, use this formula: (Balance × APY) ÷ 365 × Number of Days. If you have $25,000 at 4.5% APY for one year, that is ($25,000 × 0.045) ÷ 365 × 365 = $1,125. If you have the same balance for six months, that is ($25,000 × 0.045) ÷ 365 × 182 = $562.50. Most banks have an interest calculator on their website where you can enter your balance and see the estimated earnings.

Keep in mind that this is an estimate based on the current APY. If the bank lowers the rate during your holding period, your actual earnings will be lower. If the bank raises the rate, your earnings will be higher. The only way to may provide earnings is to use a CD with a fixed rate.

Frequently Asked Questions

How often is interest added to my account?

Most banks compound interest daily, meaning they calculate and add interest every day. Some compound monthly. Either way, the interest is usually credited to your account on the last day of the month or the last day of the quarter. You can withdraw it when ready, or it stays in the account and earns interest on top of itself.

If I withdraw money mid-month, do I lose all the interest for that month?

No. Interest is calculated daily, so you earn interest up to the day you withdraw. If you withdraw on the 15th, you earn interest for 15 days that month. You do not lose the interest you already earned, and you do not earn interest on money you have withdrawn.

Why do some banks advertise a higher APY than others?

Banks set their own rates based on their costs and competition. Online banks with no branches can afford to pay higher rates. Large national banks with thousands of branches pay lower rates because customers value convenience. During periods when the Federal Reserve raises rates, online banks raise their rates faster than national banks do.

Is the interest I earn on a savings account taxable?

Yes. Interest earned on a savings account is taxable income. 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—the bank does not withhold taxes, so you may owe taxes on interest you have already spent.

Can I earn more interest by moving my money between accounts?

You can earn more by moving to a higher-rate account, but moving between accounts does not itself generate interest. If you move $10,000 from a 0.01% account to a 4.5% account, you start earning the higher rate when ready on the new balance. The old account stops earning interest on the money you withdrew. There is no bonus for switching unless the bank is running a promotion.